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TMI Blog2013 (11) TMI 474X X X X Extracts X X X X X X X X Extracts X X X X ..... presumption that the said amount is claimed twice in the return, though the full facts in respect of the same were available before the CIT(A). The CIT(A) ought to have decided the matter on the merit. 2) Without prejudice to above, AO has wrongly made addition of Rs.14,24,448/- being excise duty on opening stock on the presumption that the same has been claimed twice. 3) On the facts and circumstances of the case and in law, the Commissioner of Income Tax (A) erred in confirming addition on account of Commission payments of Rs.17,29,389/- under section 40(a)(i) without considering the fact that the said payments are not covered u/s. 40(a)(i) of the Act and 1 or no tax was required to be deducted. 4) On the facts and circumstances of the case and in law, the Commissioner of Income Tax (A) erred in confirming addition on account of Ocean Freight expenses of RS.58,82,475/- under section 40(a)(i) without considering the fact that the said payments are not covered u/s. 40(a)(i) of the Act and 1 or no tax was required to be deducted. 5) Without prejudice to above and on the facts and circumstances of the case and in law, the CIT(A) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... resident agents. This ground is similar to Ground Nos. 1 & 2 raised by the Revenue in AY 2008-09 in ITA No.169/Mum/2012 as the CIT (A) therein has held against the Revenue on similar facts. Therefore, all the grounds are considered together for the sake of convenience. 4. Briefly stated, assessee paid an amount of Rs.17,29,389 as commission payment to non-resident agents for the services provided in foreign country. As they do not have any business connection in India, assessee has not deducted any tax when the amounts were remitted. On the reason that assessee should have remitted the amount after deducting the tax, AO invoked provisions of section 40(a)(ia) and disallowed the amount. The learned CIT (A) in AY 2007-08 rejected assessee's contentions and confirmed the disallowance. Therefore, assessee is in appeal. 4.1 In AY 2008-09 assessee paid an amount of Rs.32,73,538 to non residents for services provided in foreign countries. For the same reasons, AO disallowed the above amount invoking the provisions of section 40(a)(i). The learned CIT (A) after elaborate discussion deleted the said addition. Therefore, the Revenue is aggrieved in that year. 4.2 Before us the learned Cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 50 SOT 564 (Mum.) to submit that the commission amounts paid does not arise or accrue in India as the services are rendered outside India. Therefore, provisions of section 195 does not apply and consequently cannot be disallowed under section 40(a)(ia). He also relied on the judgment of the Hon'ble Delhi High Court in the case of CIT vs. EON Technologies, 203 Taxman 266 to submit that the payment of commission paid by the Indian Exporters to non resident agents cannot be disallowed under section 40(a)(ia). 4.5 The learned DR however, relied on the orders of the CIT (A) in AY 2007-08 to submit that having withdrawn the Board Circular and is applicable for the proceedings pending, AO has rightly disallowed the amount and so the amount has to be disallowed under section 40(a)(ia) and the order of the CIT (A) in AY 2008-09 is not correct. Therefore, that has to be reversed and the order of the CIT (A) in AY 2007-08 should be confirmed. 4.6 We have considered the issue. There is no dispute with reference to the fact that assessee paid commission at 5% on FOB value of the shipment of the product to the foreign agents and is also not in dispute that the agent is not authorized to marke ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d have approached the IT Authorities for a certificate for Nil deduction of tax. I have considered the A.O's observation for making the disallowance of commission payment ujs.40(a)(i) of the Act. I am not in agreement with the A.O's observation. It is not understood as to what more evidence should have been submitted by appellant to substantiate that the payments were not liable for TDS except claiming that the services were not rendered in India. The A.O. also incorrectly observed that the TDS provisions were applicable if services are rendered outside India but if services are utilized in India. In the case under consideration though the services were rendered outside India but the services were not utilized in India and, therefore, the A.O's observation was not relevant. The A.O's observation was also irrelevant that the appellant should have approached the IT authorities for obtaining the certificate of Nil deduction of tax. When the appellant was claiming that such payment of commission to non-resident agents was not liable for TDS therefore, there was no need for approaching the IT authorities for obtaining such certificate. In the assessment order the A.O. also considered CB ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion agents were rendering services outside India and the payments were also made outside India. In the facts and circumstances it could not be said that these commission agents were having any business connection in India particularly when these non-resident commission agents were having no permanent establishment in India. Income (in the form of commission paid by appellant) was also not arise or accrued to those non-resident through or from any asset or sources of income in India or through transfer of capital asset situated in India. In the facts and circumstances, I am of considered view that provisions of sub-sec.(I)(i) of sec.9 were not applicable in the case of payment of commission to those non-resident commission agents. The ITAT, Mumbai in the case of DCIT vs. Ardeshi B. Cursetjee & Sons Ltd. 115 ITJ 916 has held that commission paid to nonresident agents outside India for services rendered outside India were not chargeable to tax in India. In the facts and circumstances, in my considered opinion, commission paid by appellant to the non resident commission agent was not chargeable under the provisions of I.T. Act. Such payment of commission was not chargeable to tax as t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In the above Circular relevant para is No.4 dealing with the subject of foreign agents of Indian exporters. The CBDT vide Circular No.7 of 2009 dtd.22.10.2009 has withdrawn the Circular No.23/ 1969 with retrospective effect. In the Circular No.23 of 1969, CBDT clarified that the payment made to nonresident commission agents was not liable to income-tax in India. Such clarification of CBDT was based on the provisions of section 5, 7, 9, 195 and other relevant provisions of the Act. The question for consideration is when there is no relevant change in sections 5, 7, 9, 195 then as to how the withdrawal of Circular No.23 of 1969 of CBDT will make the commission paid to such non-resident commission agents taxable in India. I am of considered view that even after the withdrawal of Circular No.23 of 1969, the position will remain the same i.e. the commission paid to non-resident agents is not liable to tax under the provisions of I.T. Act when the services were rendered outside India, services were used outside India, payments were made outside India and there was no permanent establishment or business' connection in India. It cannot be accepted that by virtu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the CIT (A) in AY 2008-09 with which we fully concur as it is correct both on facts and on law, we uphold the same and dismiss the Revenue ground on this issue in AY 2008-09 and allow assessee's grounds in AY 2007-08. AO is directed to delete the addition so made. 5. In the result the grounds raised by assessee in AY 2007-08 are allowed. 6. Ground Nos. 4. The issue in this ground is with reference to disallowance of Ocean Freight Expenses paid by the assessee company to a non resident shipping company M/s Transmode Overseas Partners, Germany during the year AY 2007-08 aggregating to Rs.58,82,475, invoking section 40(a)(ia) of the Act. Similar disallowance was also made by AO in later year on payment of ocean Freight Expenses of Rs.84,12,764 paid to M/s. MSE Agency India (P) Ltd which was a general agent of M/s. Mediterranean Shipping Co. SA Geneva on the reason that TDS was not made. Assessee submitted that shipping incomes are taxable under section 172 which itself is a self contained code and therefore, as per the Board Circular No.723, provisions of section 194(C) and 195 shall not apply as provisions of section 172 applies. Assessee also relied on the decision of the Coordin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... area of operation of TDS is confined to payments made to any "resident". On the other hand, section 172 operates in the area of computation of profits from shipping business of non-resident ship-owner or characterer, he steps into the shoes of the principal. Accordingly, provisions of section 172 shall apply and those of Sections 194 C and 195 will not apply." 7.1 In view of the aforesaid Circular of the Board, the assessee company is not required to deduct tax at source from the ocean freight paid by it of Rs.58,82,475/- to M/s. Transmode Overseas Partners, Germany, because the said company is liable to tax u/s. 172 of the Act. 7.2 In the Coordinate Bench decision of the Appellate Tribunal, Delhi Bench in the case of Income Tax Officer vs. Freight Systems India Pvt. Ltd, 6 SOT 473, the Tribunal held as under: "The provisions of section 172 constitute a code in itself with regard to the mode of levy and recovery of tax in the case of any ship, belonging to or chartered by a nonresident. By virtue of sub-section (8) of section 172 'the demurrage charge or handling charge or any other amount of similar nature' are treated at par with carriage paid or payable to such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... treated as an assessee in default, so, the CIT (Appeals) after properly considering the submissions of the assessee and properly analyzing the provisions of law, has rightly cancelled the impugned orders of the Assessing Officer by passing a well-reasoned and well-discussed consolidated order. Accordingly, the impugned order of the CIT (Appeals) is upheld and the grounds of appeal taken by the revenue in the respective appeals under consideration before us are rejected. " 7.3 Further, the following decisions also support the same view: (i) Subhash Chand Gupta vs. Income Tax Officer (ITA No.898, 899 & 731/JP/2010, Jaipur dated 23.09.2011). (ii) Hindustan M-1 Swaco Ltd, Bharuch vs. Income Tax Officer (ITA No.1004/Ahd/2010, dated 7th September, 2012). 7.4 It is to be noted that the learned CIT (A) followed the same Board Circular in AY 2008-09 to delete the disallowances so made by AO by stating as under: "5.3 I have considered the facts of the case. The CBDT in Circular No.723 dtd. 19.09.1996 has stated that section 172 is a self contained code for the levy and recovery of tax, ship-wise and journey wise and required the filing of return w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsultancy services in respect of Network Solution Services at Mumbai office for smooth working of Networking system and connectivity solution and services for the Mumbai office and the branch at Ankleshwar. The expenses were of recurring in nature and there was no acquisition of an asset or advantage for enduring benefits. 8.3 A fee of Rs.3,00,000 was paid to M/s Sys Soft towards attending the issues related to payroll system based on Foxpro software and modification for statutory and/or internal business. Before the SAP ERP System, the company was having FOXPRO program. M/s Sys Soft provided the consultancy in relation to FOXPRO and SAP related issues. 8.4 Similarly, an amount of Rs.50,000 was paid to M/s Sangeeta Telang, an ERP Consultant, for her consultancy services in respect of ERP facilities, which was already in existence and thus, there was no creation of any asset. 8.5 The learned Counsel referring to the paper book and particularly the orders placed on record at Page Nos.87, 295 referred to the nature of the services to submit that the expenditure is revenue in nature. He also relied on the decision in the case of DCIT vs. Mahindra Realty & Inf. Developers Ltd in ITA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Del), on identical facts, such expenditure was held to be revenue expenditure akin to printing of pamphlets etc. It was stated that mere enduring benefit, de hors any accretion to fixed capital would not make an expenditure a capital one. In the light of such facts and the legal position emerging from the cited decision, such expenditure is held to be revenue in nature and the addition made is deleted. The AO is, however, directed to withdraw depreciation allowed to the appellant." 7. We have considered the issue. In our view the CIT(A) has rightly considered the nature of expenditure as revenue in nature. Similar issue was considered by the Hon'ble Delhi High Court in the case of CIT vs. Indian Visit.com P. Ltd. (2008) 219 CTR 603 (Del), wherein it was held as under: - "Just because a particular expenditure may result in an enduring benefit would not make such an expenditure of a capital nature. What is to be seen is what is the real intent and purpose of the expenditure and as to whether there is any accretion to the fixed capital of the assessee. In the case of expenditure on a website, there is no change in the fixed capital o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lopment. The different types of software are being developed by the said company. The some of the software may be useful for the company in manufacturing and security arrangement in different plants including networking. The investments being in the nature of strategic investments it is in the interest of the company to infuse the funds to get better results in the said company. It may be stated that the appellant company has sufficient interest free funds available to invest and/ or advances the money to the associate concern. The company has reserves and surplus of Rs. 14,76, 24,043/ in the beginning of the year even the profit of the company was Rs. 15,91,72,009/. Considering the above facts, the loan and investments of Rs.26.55 Lacs is out of the said reserves and surplus and not out of borrowed funds. We would like to invite your attention to the judgment of S.A. Builders Ltd v. CIT (2007) 288 ITR 1 (SC) where it has been held that if the investment is for the commercial expediency, the same can not be disallowed even the same is made in the company under the same management. Similarly CIT v. Reliance Utilit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee (Page 97) shows that the loan of Rs.4,50,000 was given on 20th & 28th February, 2007 and further loan of Rs.2,00,000 was given on 27th March, 2007 i.e. at the fag end of the year. AO computed disallowance of interest @ 12% p.a. i.e. Rs.78,000 without taking into account that the loan was given at the fag end of the year. AO also computed disallowance of interest of Rs.2,40,600 in respect of investment in equity shares of M/s Alphanso Netsecure Pvt Ltd of Rs.20,05,600. 9.3 It is the case of the assessee company that it has interest free funds in the form of capital and reserves and surplus aggregating to Rs.16,09,57,373 at the beginning of the year. In the year under consideration the assessee company had earned profit after tax but before depreciation allowance of Rs.12,56,30,119. Thus, the assessee company had interest free fund many fold in comparison to interest free advance of Rs.6,50,000 given at the fag end of the year and investment in shares of the group company of Rs.20,05,600. It is therefore, submitted that the aforesaid interest free loan and investment in shares are out of its own funds and not out of the borrowed funds. Hence no portion of the interest paid on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vailable on record. When we consider the amount of average loan advanced by the assessee to its sister concern, as taken by the AO, at Rs. 7.41 crores, we observe that such interest free loan is far short of interest free funds available with the assessee in the form of Shareholders' funds. The Hon'ble jurisdictional High Court in the case of CIT vs. Reliance Utilities and Power Limited (2009) 313 ITR 340 (Bom.) has held that if there are interest free funds available to an assessee sufficiently in excess of its investment and at the same time the assessee has also raised a loan, it can be presumed that the investments were from interest free funds available. In view of the fact that the interest free funds advanced by the assessee to its subsidiary company are much less than the interest free funds available with it in the shape of Share capital along with Reserve and surplus, in our considered opinion there can be no question of sustaining any addition in this regard. We, therefore, uphold the impugned order but from a different angle. This ground is not allowed". 9.5 Respectfully following the Coordinate Bench, both on facts and principles we are of the opinion that the amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 72 after considering and including investments in shares of associate concern and therefore, would amount to double disallowance". 11.1 Ground No.1 is similar to the Ground No.9 discussed in ITA No.8868/Mum/2010 in AY 2007-08. The learned CIT (A) confirmed the same for the reasons stated in AY 2007-08. Since in that year we have not upheld the order of the CIT (A), in this year also asthe facts and the legal principles being the same, we modify the order of the CIT (A) and allow assessee's grounds. An amount of Rs.4,56,672 disallowed in this year was deleted. Ground no1 is allowed. 11.2 Ground Nos. 2 & 3 pertains to invoking section 14A after disallowance of interest. The learned CIT (A) during the appellate proceedings asked assessee why disallowance could not be made on the investment made in shares of sister concern. Since no reply was furnished, he directed AO to invoke Rule 8D and make suitable disallowance under section 14A. The learned Counsel submitted that there is no proper opportunity given by the CIT (A) and without examining facts directed AO to invoke Rule 8D. It was his submission that even though Rule 8D is applicable from AY 2008- 09 the same cannot be invoked un ..... X X X X Extracts X X X X X X X X Extracts X X X X
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