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TMI Blog2015 (3) TMI 399X X X X Extracts X X X X X X X X Extracts X X X X ..... deduction claimed by the assessee under the head ‘agency commission’ u/s. 40(a)(i) - Held that:- On applicability of Expln-2 to Sec.195(1) of the Act which was introduced by the finance Act, 2012 w.e.f. 1.4.1962, we are of the view that the said explanation is applicable only when there is accrual of income in India. When the conclusion reached is that there is no accrual of income in India, we fail to see how Expln.2 to Sec.195(1) of the Act are attracted. Thus there was no obligation on the part of the Assessee to deduct tax at source while making payment to the non-resident. Consequently, no disallowance of commission expenses paid to non-resident could be made invoking the provisions of sec.40(a)(i) of the Act. We hold accordingly and direct the AO to delete the disallowance so made. - Decided in favour of assessee. - ITA No. 1091/Bang/2013 - - - Dated:- 13-2-2015 - Shri N.V. Vasudevan And Shri Abraham P. George JJ. For the Appellant : Shri Cherian K. Babay, C.A. For the Respondent : Revenue by : Shri P. Dhivahar, Jt. CIT(DR) ORDER Per N.V. Vasudevan, Judicial Member This appeal by the assessee is against the order dated 1.5.2013 of the CIT(Appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rove any write off of foreign exchange debtors. ( B21 - Write off by AD Category-I banks in Section B - Operational Guidelines for AD Category-I banks in Part 3 of the Circular). 6. Therefore, pending this approval, the assessee was legally precluded from writing off the balance of ₹ 1,33,28,679/- in AY 2007-08. Hence 100% provisioning was done in that year. This provision was created with the intention of complying with the said RBI Circular while simultaneously seeking to ensure that the financial statements present a true and fair view as at that date (31st March 2007). 7. Accordingly an application was made to Syndicate Bank (the relevant AD Category-I bank, [hereinafter referred to as the Bank ], (with whom the export documents were lodged for collection) on 23-02-2008 who accorded its approval to the write off as on 31.3.2009 vide their letter on 21st April, 2009, prior to the finalisation of accounts for the year ended 31st March, 2009. The debt was thus written off as bad for the year ended 31st March, 2009. 8. The assessee follows the mercantile system of accounting. Accounting principles generally accepted in India (issued by the Institute of Chartered A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... did not allow the claim of assessee for the reason that there was no write off of the debt in question in the previous year relevant to A.Y. 2009-10, but that was written off as bad debts in the previous year 2006-07 relevant to A.Y. 2007-08. The second objection of the AO was that Syndicate Bank permitted the assessee for write off of the debt as bad debt by its letter dated 21.4.2009, which date falls within the previous year relevant to A.Y. 2010-11 and therefore the assessee, if at all, can make a claim for deduction only in A.Y. 2010-11. 13. On appeal by the assessee, the CIT(Appeals) concurred with the view of the AO. 14. Aggrieved by the order of CIT(Appeals), the assessee has preferred the present appeal before the Tribunal. 15. We have heard the submissions of the ld. counsel for the assessee, who after bringing out the undisputed facts as explained in the earlier part of this order, placed reliance on the decision of the Hon ble Supreme Court in the case of TRF Ltd. v. CIT, 323 ITR 398 (SC) and Southern Technologies Ltd. v. JCIT, 320 ITR 577. It was his submission that the assessee should be allowed the deduction as the debt in question has been written off by s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was precluded from writing off the debt, pending completion of formalities and so chose to provide for it. At this stage, one out of the two accounting requirements for a write off was satisfied. Though the profit and loss account had been debited through the expense ledger, the debtors account had not yet been credited. The debit balance in the debtors account continued, but was offset by an equal credit balance in the provision for doubtful debts account. 19. In AY 2009-10, on receiving the bank s approval, the provision for doubtful debts account was debited and credit was given to the debtors account for write off of the amount i.e., the debtor s balance was nullified and the debtor s account closed. At this stage, the second accounting requirement (closing the debtor s account by crediting it) had also been met and the write off was complete. 20. The Revenue s argument is that there is no debit to the profit and loss account in the relevant previous year and that therefore no amount has been written off as shown above, while the fact as stated by the Revenue is correct, its conclusion is erroneous. 21. Considering the accounting principles described above, it cannot b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the assessee and that there was no territorial nexus for bringing the commission received by the non-resident to tax in India. The assessee further submitted that if the income of the non-resident is not chargeable to tax in India, then there was no obligation on the part of assessee to deduct tax at source and in this regard relied on the CBDT Circular No.13 dated 23.7.1969. The aforesaid Circular has since been withdrawn, but nevertheless, the assessee placed reliance on the aforesaid Circular, which lays down the correct position in law. 25. The AO, however, held that non-resident has source of income and business connection in India and therefore commission income is chargeable to tax in India and that the assessee ought to have deducted tax at source at the time of making payment to the non-resident. Since the assessee failed to do so, the AO disallowed the claim of assessee for deduction of a sum of ₹ 25,46,796 invoking the provisions of section 40(a)(i) of the Act. 26. On appeal by the assessee, the CIT(Appeals) confirmed the order of the AO. According to the CIT(Appeals), section 9(1)(i) of the Act was applicable and all income accruing or arising, whether d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll these cases, the territorial jurisdiction of these agency rights is restricted to one country or, in some cases, three countries. (4) No agent is granted rights in India. (5) In consideration for these sales, commission (usually of 5% or 6%) on the FOB prices of the orders actually booked is paid by the assessee to the agents. (6) The agreements have been entered into on various dates and are for preliminary terms of three years each but automatically renew from year- to- year. (7) The sums attracting disallowance represent the commission paid under these agreements. 31. It was submitted that in the light of the above facts, three questions arise for consideration before the Tribunal as follows:- (1) Is the commission paid to the agents by the assessee chargeable to tax in India either in full or in part at the hands of the agents in the light of the provisions of section 9 and the relevant Double Taxation Avoidance Agreements (DTAAs)? (2) If the income is so chargeable, is tax deductible at source there from under section 195? (3) Did the assessee act against the law by not approaching the Income Tax Department in terms of section 195(2)? 32. It wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o permanent establishment in India, the amount in question cannot be brought to tax in the hands of the non-resident and consequently there would be no liability on the part of assessee to deduct tax at source. 37. The ld. DR relied on the order of the CIT(Appeals). 38. We have considered the rival submissions. The copies of the Agreement between the Assessee and the non-resident (7 out of the 10 non-residents listed in the earlier part of this order) has been filed before us as Annexure-H in the paper book filed by the Assessee. The main clauses in the agreement needs to be seen to appreciate the contentions of the parties before us.(Agreement between Assessee and M/S.Duo Textiles) Clause-1, 3 and 4 of the Agreement reads as follows: 1. APPOINTMENT: Principal grants Agent the right to sell the merchandise (stipulated in Article 2) in the territory (stipulated in Article 3) and Agent accepts such appointment. 3. TERRITORY: The Territory covered under this agreement is confined to South Africa. 4. COMMISSION: Principal shall allow the Agent 5% commission for all Merchandise (based on FOB prices) Commission are not payable later than 2 (two) months after m ..... X X X X Extracts X X X X X X X X Extracts X X X X
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