INDIAN SUMMER

IN THE HIGH COURT OF DELHI AT NEW DELHI . 21.1.2011 . Present: Mr. T.N. Chopra, Advocate with Mr. Shivendra Kumar Singh and Mr. Manu Advocates for the appellant. Mr. Kamal Sawhney, Advocate for the respondent/Revenue. . +ITA 80/2011 . Admit on the following substantial questions of law:- . ?(i) Whether on the facts and circumstances of the case, the learned Income Tax Appellate Tribunal is correct in law in sustaining the addition of ` 14,14,531/- under Section 40 (a) (i) of the Income Tax Act being payable made to foreign agent of Israel namely Babeth CIE? . (ii) Whether the order of the Ld. Tribunal is vitiated by vice of perversity in as much as facts and evidence filed before the learned Tribunal in the form of paper book containing detailed correspondence of the assessee with the foreign agent has not been considered by the Tribunal? . (iii) Whether the learned Tribunal is correct in law and on fact n holding that the payment made by the assessee is fee for technical services (FTS) when no such finding has been recorded by the Revenue and no such issue arose from the order of the Ld. CIT (A) and the fact that the impugned finding regarding FTS has been recorded without allowing any opportunity to the assessee.? . . Filing of paper books is dispensed with. With the consent of the learned counsel for the parties, we have heard the matter finally. The facts of the matter can be explained briefly which are as under:- The appellant/ assessee herein is a registered firm engaged in the business of exports of garments. For the relevant assessment year i.e. 2004-05, the assessee was having arrangement with M/s Babeth CIE (an Israel firm) which . . according to the appellant was procuring export orders for the appellant firm. The said foreign firm has been providing the design in development of styles according to which garments were to be manufactured by the assessee for exports. The assessee had paid a sum of US $ 30147.73 (Equivalent to ` 14,14,531/- ) to the said foreign company. This payment was claimed as business expenditure and deduction thereof was sought under Section 37 of the Income Tax Act (hereinafter referred to as the ?Act?). The Assessing Officer, however, disallowed the said expenditure on the ground that required tax at source was not deducted while making the payment and, therefore, provisions of Section 40 (a) (i) of the Act were applicable and on that premise, the expenditure was disallowed. The submission of the appellant/assessee before the Assessing Officer was that the aforesaid foreign company had rendered the services as an agent abroad. The services had been rendered through its representative business associate namely M/s La Feria having its office at Paris. It was also the explanation of the assessee that the range of services rendered to the assessee by M/s La Feria comprised; (a) Sending sketches of designs and colours of the garments to be made. (b) Finalizing samples by alterations/corrections (c) Negotiating prices of the garments with the customers on behalf of the assessee. (d) Arranging buyers to visit the factory of the assessee. (e) Getting orders on the basis of samples from different buyers/stores abroad. (f) Conformation of orders, prices, delivery schedule, getting LOC opened by foreign buyers for the assessee. (g) Giving instructions to the assessee for shipment including folding, packing, labeling etc. . For all the above services and to develop business of the assessee the foreign agent charged a fee which was paid by the assessee only after execution of the orders and realization of the sale proceeds. The aforesaid explanation was not accepted having regard to the bill issued by M/s Babeth CIE to the assessee for making the aforesaid payment as in that bill it was mentioned that the payment was due for design and development of style mentioned therein ?as done by our representative office (M/s La Feria, D-912, New Friends Colony, New Delhi-110065)?. On the basis of this averment in the said bill, the Assessing Officer concluded that the foreign company has a permanent establishment in India, therefore, its services were rendered to the assessee and, therefore income deemed to accrue/arise in India to the said foreign company and tax at source was thus deductable. The assessee filed appeal thereagainst before the CIT (A) as well as ITAT but remained unsuccessful. It is in these circumstances, the present appeal is filed under Section 260-A of the Act raising the aforesaid questions of law on which this appeal has been admitted. Learned counsel for the assessee has raised following grievances challenging the order of the Tribunal:- (a) It is submitted that the assessee had specifically pointed out to the Tribunal that such payments were allowed by the Assessing Officer not only in earlier assessment years but also in later years. But this submission of the assessee was brushed aside and was not given any serious consideration only because of the reason that the assessee did not file evidence to show that these assessments were made under the provision of Section 143 (3) of the Act. Learned Counsel for the assessee has produced copies of these assessment orders before us which clearly reflect that these orders were passed by the Assessing Officer under Section 143 (3) of the Act. (b) Learned counsel for the assessee further submits that the statement which is recorded in the bill issued by the foreign company only meant that the designs were supplied through office in India. It was loosely worded letter and much . . credence could not have been given to it. His submission is that plethora of evidence was filed before the Tribunal clearly demonstrating that these designs were prepared and styles developed by M/s La Feria in Peris and they were sent from Paris which were supplied to the assessee by Ms/ La Feria at its office in New Friends Colony, New Delhi. It was the contention of the assessee that this was only a Guest House no services were provided in India and in so far as supply of these designs and development of styles to the assessee is concerned. The office of M/s La Feria in Delhi only acted as a post office. It is further submitted that evidence was produced to prove that the premises of M/s La Feria at New Friends Colony was only a Guest House. According to the learned counsel, no such evidence is even looked into and all the authorities below have gone by the said bill on the basis of which they have arrived at a wrong finding namely the office at New Friends Colony, New Delhi as the permanent establishment in India. (c) Apart from the above, learned counsel for the assessee has also produced copy of Circular No. 786, dated 7th February, 2000 issued by CBDT which, inter alia, provides that whenever export commission and charges are payable for services rendered outside India, the expenditure should not be disallowed under the provisions of Section 40 (a) (i) of the Act on the ground that tax at source is not deducted. After hearing the learned counsel for both the sides, we are of the opinion that the aforesaid submissions are not given due consideration by the Income Tax Appellate Tribunal in the impugned order. Before acting and resting its decision solely on the aforesaid bill, it was the bounden duty of the Tribunal to look into the other documents filed by the assessee on the basis of which the assessee wanted to establish that the services were rendered outside India. Even before arriving at a conclusion that the payment made by the assessee is for technical services u/s (1) (vii) of the Act, these aspects should have been looked into. For this reason, we set aside the order of the Tribunal and remit the case back for examining and analyzing the documents produced by the assessee. The assessee shall also be entitled to rely upon the aforesaid Circular No. 786 dated 7th February, 2000 and effect thereof shall be examined by the Tribunal in its true perspective. The appeal is allowed in the aforesaid terms. . A.K. SIKRI, J. . M.L. MEHTA, J. JANUARY 21, 2011 skb . . #23