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2019 (8) TMI 441 - AT - Income TaxTDS u/s 195 - compensation paid for breach of contract for supply of material to foreign buyer - disallowance u/s 40a(ia) - HELD THAT - There is no dispute that the payment was made towards the assessee s failure to supply the export order which constitutes business transaction. As per the DTAA between India and Malaysia, as per Article vii, business profits of an enterprise of one of the contracting states should be taxable only in the contracting state, unless the enterprise carries on business in other contracting state through a permanent establishment situated theirin. There is no evidence brought on record that the sum paid to foreign buyer is income within the meaning of Article VII of DTAA to be taxable in India. The department did not establish that foreign company has a permanent establishment in India, therefore, we hold that the sum paid to the foreign buyer does not attract TDS u/s 195 and there is no case of making disallowance u/s 40(a)(ia). Accordingly, the addition made by the AO is deleted and the appeal of the assessee is allowed. TDS u/s 195 - Addition u/s 40(a)(i) - payment was made towards quality rebate on export - HELD THAT - The assessee placed copies of invoices of export. The assessee also placed copy of letter dated 19.12.2016. addressed to SBI, Hyderabad informing them that due to some quality problems, the assessee had agreed to give discount of USD 2500 to the party. Since it is a quality rebate towards discount, the assessee argued that the same does not attract TDS. Since the assessee has established that it is a quality rebate with relevant documents which goes to reduce the sale, there is no case for deduction of tax at source. Apart from the above it is established that the payment was quality rebate on sales and business transaction. As per Article VII of DTAA between India and UK, the business profits are taxable in contracting state and in this case, the recipient is foreign company having no permanent establishment. The case law relied upon by the Ld.AR is squarely applicable in the assessee s case. Hence, we hold that there is no case for deduction of tax at source and making the addition u/s 40(a) (i). Accordingly addition made by the AO is deleted and the appeal of the assessee is allowed.
Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act. 2. Disallowance of expenditure under Section 40(a)(ia) for non-deduction of tax at source under Section 195. Issue-wise Detailed Analysis: 1. Disallowance under Section 14A: - Ground No. 1.1: The AO disallowed ?1,15,145/- on equity investments as directed by the Dispute Resolution Panel (DRP). During the appeal hearing, the assessee did not press this ground. Therefore, this ground was dismissed as not pressed. 2. Disallowance of expenditure under Section 40(a)(ia) for non-deduction of tax at source under Section 195: - Ground No. 1.2: This issue pertains to the disallowance of contractual payments made to foreign companies M/S Hoe Seng Chan, Malaysia, and M/S ITOCHU Europe PLC, UK, due to non-deduction of tax at source under Section 195. - Facts: The assessee made a payment of ?28,32,572/- to M/S Hoe Seng Chan for breach of contract and ?1,11,988/- to M/S ITOCHU Europe PLC as a quality rebate. The CIT held that the assessment was erroneous and prejudicial to the interest of the revenue and directed the AO to examine the disallowance under Section 40(a)(ia). - Assessee's Argument: The assessee argued that the payment to M/S Hoe Seng Chan was compensation for non-fulfillment of a contract and hence not liable for TDS. Similarly, the payment to M/S ITOCHU Europe PLC was a quality rebate and not subject to TDS. The assessee contended that as per the Double Taxation Avoidance Agreement (DTAA) with Malaysia, business profits are taxable only in Malaysia if the foreign company has no permanent establishment (PE) in India. - Revenue's Argument: The Revenue argued that the assessee was required to deduct tax at source under Section 195, and since it failed to do so, the AO rightly made the addition. - Tribunal's Findings: The Tribunal noted that the payment to M/S Hoe Seng Chan was for business loss due to the assessee's failure to supply goods and constituted income in the hands of the recipient company. Similarly, the payment to M/S ITOCHU Europe PLC was a quality rebate. The Tribunal referred to Article VII of the DTAA between India and Malaysia, which states that business profits are taxable only in the contracting state unless the enterprise has a PE in the other contracting state. Since M/S Hoe Seng Chan had no PE in India, the income was not taxable in India, and hence, there was no requirement to deduct tax at source. The Tribunal relied on the decision of Goldcrest Exports, ITAT, Mumbai, which held that there is no obligation to deduct tax under Section 195 if the income is not taxable in India. - Conclusion: The Tribunal held that the payments made to the foreign companies did not attract TDS under Section 195 and hence, the disallowance under Section 40(a)(ia) was not warranted. The additions made by the AO were deleted, and the appeal of the assessee was allowed. Judgment: - The appeal of the assessee was allowed, and the additions made by the AO under Section 40(a)(ia) were deleted. The Tribunal concluded that the payments made to the foreign companies were not subject to TDS under Section 195 as per the DTAA provisions.
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