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TMI Blog2014 (9) TMI 268X X X X Extracts X X X X X X X X Extracts X X X X ..... . For the Respondent : M. Balaganesh. ORDER :- Per Bench: All these appeals are filed by the Revenue against the orders of the Commissioner of Income Tax (Appeals)-II, Chennai for various assessment years. As the issue involved is common in all these appeals, they are clubbed and heard together and disposed off by this common order for the sake of convenience. 2. The common issue in all these Revenue appeals is that Commissioner of Income Tax (Appeals) erred in deleting disallowance made by the Assessing Officer under section 40(a)(i) of the Act on account of non-deduction of tax at source out of agency / sales commission payments made by the assessee to its non-resident agents. In all these appeals, Assessing Officer while completing assessments invoked provisions of section 40(a)(i) read with section 195 of the Act on the commission payments made to non-residents holding that assessee has not deducted TDS on the said payment and therefore, commission is not allowable as deduction under section 40(a)(i) of the Act. On appeal, Commissioner of Income Tax (Appeals) considering the submissions of the assessee and the case law relied on by the assessee deleted the disallowance ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere rendered outside India by non-residents and therefore, provisions of section 195 have no application so as to disallow commission payments under section 40(a)(i) of the Act. While holding so, the Commissioner of Income Tax (Appeals) considered various decisions on the issue including the decision of the Hon'ble Supreme Court in the case of GE India Technology Centre (P.) Ltd. (supra). The Commissioner of Income Tax (Appeals) in one of the cases before us in K.H. Arind Pvt. Ltd., following the decision of co-ordinate Bench of this Tribunal in the case of Farida Shoes (P.) Ltd. (supra) deleted the disallowance observing as under:-- "Before the undersigned, the assessee company submitted that a similar issue was recently adjudicated by the Hon'ble Income Tax Appellate Tribunal (A-Bench) of Chennai, vide its order in ITA Nos.359 & 360/Mds/2013 dated 11.04'.2013, in the cases . of M/s. Farida, Shoes (P.) Ltd. and M/s. Farida Prime Tannery P Ltd. In the said cases the payments made to the non-residents, without making TDS, were similar to those made by the assessee company. The Assessing Officer disallowed the said payments u/s.40(a)(i) for non-deduction of TDS u/s.195 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee was not liable to deduct tax at source from payment of commission to ETUK. The head note of adder is reproduced hereunder: "Section 9 of the Income-tax Act, 1961 - Income - Deemed to accrue or arise in India Assessment year 2007-08 - Assessee-company was engaged in business of development and export of software - During. relevant assessment year, it had paid commission to its British parent/holding company ETUK on sales and amounts realized on export contracts procured by ETUK for assessee - Assessing Officer held that commission income earned by ETUK had accrued in India or was deemed to accrue in India and, therefore, assessee was liable to deduct tax at source there from and as there was failure, said expenditure should be disallowed under section 40(a)(ia) - Whether when ETUK was not rendering any service or performing any activity in India itself commission income could be said to have accrued, arisen to or received by ETUK in India merely because it was recorded in books of assessee in India or was paid by assessee situated in India - Held, no - Whether for applying section 9. Assessing Officer was required to examine whether said commission income was accru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection in India nor they have any permanent establishments in India. They are procuring export orders for the assessee. Thus, the said non-resident agents are operating outside the country and all the services are rendered abroad only. In other words, though the said non-residents are rendering services to the assessee (Indian company), these services are rendered totally outside the country. In such a situation the payments (commissions) made to such agents are not liable to be taxed in India. TDS is required to be deducted on all payments to non-residents if the said payments are. liable for tax in India. In the instant case, the commission payments to the non-resident agents are not taxable in India as the services are rendered abroad and the agents have no PE in India. Therefore, there is no requirement to deduct TDS on these payments. For this purpose reliance is also placed on the decision of Apex court in the case of GE India Technology Cen. (P.) Ltd. v. CIT [2010] 327 ITR 456 (SC) wherein it was held as under: • Section 195 of the Income-tax Act, 1961- Deduction of tax at source - Payment to non-resident - • Whether the moment a remittance is made to a non- r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n account of disallowance of commission payments for non-deduction of TDS u/s.40(a)(i) r.w.s. 195 of the Act are not justified and deleted.' 6. Similar issue has been considered by this Tribunal in the case of ITO v. Faizan Shoes (P.) Ltd. 58 SOT 245, wherein co-ordinate bench of this Tribunal, to which one of us is a party, after considering the decision of the Hon'ble Supreme Court in the case of GE India Technology Centre P. Ltd. (supra) held that sales commission paid by the assessees to non-residents are not chargeable to tax in India, therefore provisions of section 195 are not applicable. On going through the above order of the Commissioner of Income Tax (Appeals), we find that in all these cases assessees paid sales commission to its non-resident agents for the services rendered by them outside India and the sales commission is not chargeable to tax in India so as to deduct TDS on such payments under section 195 of the Act. Therefore, respectfully following the decision of the Hon'ble Supreme Court in the case of GE India Technology Centre (P.) Ltd. (supra) and the above cited decision of the co-ordinate bench of this Tribunal, we sustain the order of the Commi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om 276, Authorized Representative submits that when there is no finding given by the Assessing Officer that assessee has incurred expenses for earning taxable income, provisions of section 14A cannot be invoked. He submits that the Hon'ble High Court in the above cited case held that in the absence of any such finding by the Assessing Officer, disallowance under section 14A cannot be made. 10. Heard both the parties. Perused the orders of lower authorities. The Commissioner of Income Tax (Appeals) held that 10% of income from the firm should be considered as disallowance under section 14A of the Act observing as under:-- "I have considered the assessee's submissions carefully. As could be seen from the balance sheets of the assessee company for various financial years, the total interest-free own funds of the assessee ranged from 42.95 crores (in F.Y.2002-03) to ₹ 50.20 crores (in F.Y.2011-12). Out of these amounts, the paid up share capital of the assessee company is only ₹ 1.20 crores and the balance is reserves and surplus from the accumulated profits over the years. These are the non-interest bearing own and free funds available with the assessee com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dit loan was diverted for the purpose of investments in the partnership firm. There is another significant feature in the packing credit loan availed by the assessee. The investments in the partnership firm ware withdrawn by the F.Y.2011-12 i.e. the investments in the partnership firm were nil as on 31.03.2012 and 31.03.2013. However, the packing credit loans availed by the assessee continued to be more or less same even during the F.Ys.2011-12 and 2012-13. This also shows that the packing credit was availed for the purpose of purchase of raw material and manufacturing the goods for export and it was not used for investing in the partnership firm. Hence the Assessing Officer is not justified in coming to the conclusion that the interest bearing funds, especially the packing credit loans, were utilized for the purpose of making investments in the partnership firm and invoking the provisions of sec. 14A of the Act. Further, as could be seen from the P&L accounts of the financial years ending on 31.03.2008,31.03.2009 and 31.03.2010, the total business receipts/income (from export sales, local sales and the export sale related incomes like duty draw back, exchange fluctuation etc) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies 62,58,337 37,27,180 59,91,797 General Expenses 90,813 56,449 83,240 Exchange Fluctuation - 46,94,01 - Total 2,16,52,890 2,27,57,914 1,80,89,321 Perusal of the above details of the P & L account clearly showed that all the expenses debited except the administrative expense are relating to the manufacturing and export activities. Therefore, none of the expenses debited in the form of (i) Materials Consumed, (ii) Salaries and Wages, (iii) Manufacturing Expenses, (iv) Selling Expenses, (v) Interest and Bank Charges and (vi) Depreciation, are attributable to the investments in the partnership firm and the income (profit) generated therefrom. Only the administrative expenses debited in the P&L account, could be considered as common expenses. Again, among the various items included in administrative expenses, several items are either directly related to the manufacturing and export activity or not connected to the investments in the partnership firm. Therefore, the administrative expenses are to be segregated on these lines, before arriving at the common expenses, if any, as under: 31.03.2010 31.03.2009 31.03.2008 17. ADMINISTRATION EXPENSES (a) Attributable to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re amounts of investments in the partnership firm are coming from the earlier years, as under: P. Y. ending on A.Y. Investments in the Partnership firm 31.03.2007 2007-08 471,291,887.00 31.03.2008 2008-09 424,251,024.00 31.03.2009 2009-10 355,570,695.00 31.03.2010 2010-11 328,378,379.00 31.03.2011 2011-12 34,273,749.00 Under these circumstances, the involvement of man power and the infrastructural facilities of the assessee company in making the above investments in the partnership firm will be practically insignificant. Hence a blanket disallowance of expenses @ 0.5% of the average investments, as per clause (iii) of Rule 8D is not justified. On the other hand, the assessee company in its return of income filed for A.Y.2010-11, on its own disallowed as sum of ₹ 6,12,969/-, being 10% of the income received by way of share of profit from the firm, u/s.14A of the Act and added to the total income. Even this self disallowance @ 10% of the income received by way of share of profit from the firm, u/s.14A of the Act, by the assessee in A.Y.2010-11, is on higher side considering the nature of efforts made in the investments in the partnership firm. However, sin ..... X X X X Extracts X X X X X X X X Extracts X X X X
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