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TMI Blog2023 (10) TMI 1062X X X X Extracts X X X X X X X X Extracts X X X X ..... . Deferred revenue expenditure - case of the assessee is that as per the Accounting Practice, the assessee was to recognize expenditure on deferred basis but for the purpose of income tax, the entire expenditure was allowable - AO did not agree to this contention of the assessee and proceeded to disallow the sum being the upfront fee attributable to the next year - HELD THAT:- The assessee had only sought to defer the said payment over the period of the loan of two years on a proportionate basis. In our considered opinion, this treatment in the books has got nothing to do with the claim of deduction under the provisions of the Act. For the purpose of income tax, the entire payment of Rs 8 crores, being incurred and paid during the year would become allowable, as long as the loan borrowed is utilized for the purpose of the business. In the instant case, there is no dispute that the term loan availed from Yes Bank is utilized for the purpose of business of the assessee. Hence the upfront fee / facilitation charges paid for the said loan would become squarely allowable as deduction in the year of incurrence itself. No infirmity in the order of the ld. CIT(A) granting relief ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... int Investments reported in 372 ITR 694(Del). It is not in dispute that there was no exempt income derived by the assessee during the year under consideration. The ld. DR before us vehemently relied on the amendment brought in Section 14A of the Act by the Finance Act 2022 and argued that the same need to be construed as retrospective in operation as according to him, it was merely clarificatory in nature. This argument of the ld. DR had been specifically addressed by the Hon ble Jurisdictional High Court in the case of PCIT vs Era Infrastructure (India) Ltd reported in 141 taxmann.com 289 (Del HC) dated 20.7.2022 wherein it was held that the amendment made by Finance Act, 2022 to section 14A of the Act by inserting a non-obstante clause and Explanation will take effect from 1-4-2022 and cannot be presumed to have retrospective effect. It further held that no disallowance could be made under section 14A of the Act if no exempt income was earned by assessee during the year under consideration. Respectfully following the aforesaid judicial precedents, the Ground No. 1 raised by the revenue is dismissed. 4. The last issue to be decided in the appeal of the revenue is as to whether ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts in future years, was also written back in the computation of income of future years, thus there is no loss to the revenue. Furthermore, the assessee company is a loss making company, and even after making such disallowance, the assessee remained a loss making company in this year as well as ensuing two years. Thus, this suggest that even if disallowance is made or not made, the same would be revenue neutral. 6.2.4 Thus, in view of the above, the addition of Rs. 5,37,34,610/- made by the AO is deleted. This ground of appeal is allowed. 4.2. It is not in dispute that the sum of Rs. 8 crores is incurred and paid during the year under consideration. The assessee had only sought to defer the said payment over the period of the loan of two years on a proportionate basis. In our considered opinion, this treatment in the books has got nothing to do with the claim of deduction under the provisions of the Act. For the purpose of income tax, the entire payment of Rs 8 crores, being incurred and paid during the year would become allowable, as long as the loan borrowed is utilized for the purpose of the business. In the instant case, there is no dispute that the term loan availed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in 125 ITR 525 (SC) and b) Decision of Hon ble Supreme Court in the case of GE India Technology Center (P) Ltd vs CIT reported in 327 ITR 456 (SC) 6.3. The ld. CIT(A) observed that Shye International Ltd is a resident of Hong Kong, Special Administrative Region. The commission is paid to them for procurement of solar modules from various Chinese companies. The benefit of Double Taxation Avoidance Agreement (DTAA) was not available between India and Hong Kong and that the DTAA came into force only from 21.12.2018 and hence cannot be made applicable for the year under consideration. The ld. CIT(A) distinguished the case laws relied upon by the assessee by holding that the said case laws pertain to payment of export commission, whereas in the present case , commission is paid for import of goods and the goods imported were used in India. Therefore, the foreign agent would be deemed to have business connection in India and hence the payment made to them would be chargeable to tax in India. With these observations, the ld. CIT(A) upheld the action of the ld. AO. 6.4. The ld. DR argued that since there is no DTAA between India and Hong Kong for the year under consideration, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Firstly, we will endeavour to determine if the amount of commission is taxable in the hands of the non-resident agent. The scope of total income of a non- resident is governed by section 5(2) of the Act. This section provides that all income of a non-resident from whatever source derived which (a) is received or is deemed to be received in India in such year by or on behalf of such person or (b) accrues or arises or is deemed to accrue or arise to him in India during such year, shall be included in his total income. It is patent that the non-resident did not receive such income in India inasmuch as the assessee made payment for such commission to the non-resident outside India. Section 7 defines 'Income deemed to be received'. It refers to the annual accretion to the balance at the credit of an employee participating in a recognized provident fund; transferred balance in a RPF to some extent; and the contribution made by the Central Government or any other employer to the account of an employee under Pension Scheme referred to in section 80CCD. From the description of the contents of section 7, it can be seen that the commission received by a non-resident cannot be charact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is attributable to the operations carried out in India, shall be deemed to accrue or arise in India. Thus, it is clear that in order to bring any income within the ambit of section 9(1)(i), it is sine qua non that the activity resulting into such income should be carried out in India. Notwithstanding the existence of a business connection in India, as even understood in the widest possible amplitude, an income will fall u/s 9(1)(i) only to the extent it results from the operations carried out in India. If no operations for earning such income from business connection are carried out in India, the applicability of clause (i) to this extent is ruled out. As, admittedly, the non-resident payee carried out his operations outside India, the command of clause (i) of section 9(1) cannot apply. The other six clauses of section 9(1), namely, clauses (ii) (iii) dealing with income under the head 'Salaries'; clause (iv) dealing with 'Dividend'; clause (v) dealing with 'Interest'; clause (vi) dealing with 'Royalty'; and clause (vii) dealing with 'Fees for technical services', have no application to the facts and circumstances of the instant case. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eable under the head 'Salaries' shall, at the time of credit of such income to the account of the payee or at the time of payment thereof, whichever is earlier, shall deduct income-tax thereon at the rates in force. A circumspection of this provision indicates that in order to attract the withholding of tax on a payment made to a non-resident, it is essential that the sum should be chargeable to tax in the hands of the payee under the provisions of this Act. It is quite natural also because a liability for deduction of tax at source pre-supposes tax liability in the hands of the payee. If there is no tax liability in respect of the payments made to the payee, there can be no question of deducting any income-tax at source from such payment. Only if the amount is chargeable to tax in the hands of the recipient that the question of deducting any tax at source therefrom arises. In an earlier para, we have seen that the export commission is not chargeable to tax in the hands of non-resident in terms of section 5(2) of the Act. The natural outcome, which, therefore, emerges is that there can be no obligation of the assessee-payer to deduct tax at source on such commission payment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he amount is not chargeable to tax in the hands of the payee, then, no liability to deduct tax at source can be fastened on the payer. Thus it is vivid that the insertion of the Explanation 2 has not brought any change to the factual position obtaining before us. The effect of insertion of Explanation to section 195(1) is simply to clarify about liability of deductor. It has not done away with the pre-requisite condition of section 195(1) which mandates that amount should be chargeable to tax in the hands of the payee. In our considered opinion, the ld. CIT erred in invoking Explanation 2 to section 195(1) for treating the assessment order erroneous and prejudicial to the interest of the Revenue on account of non deduction of tax at source from the commission payment to the non-resident and the consequential non-making of disallowance u/s 40(a)(i) of the Act. 10. The ld. DR vehemently accentuated on Circular no. 7 of 2009 to contend that with the withdrawal of the earlier benevolent circulars on this issue, the instant commission payment has become chargeable to tax in the hands of the payee and in the absence of the assessee having deducted tax at source, the ld. CIT was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble under section 195 on such payment by the payer. Resultantly, no disallowance is called for u/s 40(a)(i) of the Act. 13. It can be seen that the ld. CIT relied on two decisions of the Authority of Advance Ruling in SKF Boilers Driers (P.) Ltd. (supra) and Rajiv Malhotra (supra). It is correct that at least in SKF Boilers (supra),the Authority has held that the payment of commission on export orders is chargeable to tax u/s 5(2)(b) read with section 9(1)(i) of the Act. By an independent evaluation of the matter in the light of the provisions of section 5(2) read with section 9 of the Act, we have held above that the foreign commission is not chargeable to tax in the hands of the non-resident. Be that as it may, it is important to note that it is not a solitary precedent available on the subject. The Hon'ble jurisdictional High Court in DIT v. Panalfa Auto Elektrik Ltd. [2004] 272 CTR (Delhi) 117, has held that the services rendered by non-resident agent for procuring export orders for the assessee cannot be held as fees for technical services u/s 9(1)(vii) of the Act. In this case, the assessee made an application u/s 195(2) for authorization to remit certain amoun ..... X X X X Extracts X X X X X X X X Extracts X X X X
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