M/S AQUARELL INDIA PVT LTD,BENGALURU vs. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-1(1)(1), BENGALURU

O R D E R PER D.S. SUNDER SINGH, A.M:

This appeal filed by the assessee is directed against the order of the Commissioner of Income Tax (Appeals)-1, Bengaluru (hereafter referred as “CIT(A)”) in dated 27.09.2017 for the Assessment Year (AY) 2014-15.

The assessee further submitted before the AO that interpretation of the section should be made in a manner in which it promotes the objective sought to be achieved and not to frustrate it. The Ld AR further submitted before the AO that beneficial provision must be interpreted liberally. The assessee submitted that deduction should not be restricted to the employees joined before 5th June but should be extended in respect of the employees completed 300 days on or before filing the return. Not being convinced with the explanation of the assessee, the AO rejected the explanation observing that the definition of new workmen in section provides only for the new workmen employed for period of not less than 300 in the impugned assessment years and thus, the AO allowed the deduction u/s. 80JJAA of the Act for 24 workmen who completed 300 days of employment during the impugned assessment year amounting to Rs. 31,94,301/- and the balance amount of Rs. 91,18,238/-. was disallowed added back to the income.

3. Aggrieved by the order of the AO the assessee went on appeal before the Ld. CIT(A) and the Ld. CIT(A) dismissed the appeal of the assessee holding that the assessee is eligible for deduction u/s. 80JJAA of the Act only in respect of employees cost in respect of the employees who completed the employment not less than 300 days during the previous year under consideration, such workmen should not be casual workmen or workmen employed through contract labour.

The ld. CIT(A) further viewed that if some workmen employed for a period of less than 300 days in the previous year the deduction is not allowable in respect of payments of wages to such workmen in the current year, even, if such workmen has employed in the preceding year for more than 300 days but in the present year such workmen has not completed for 300 days. For the sake of clarity and convenience, we extract the part of the Ld. CIT(A) order at para 22 to 25, which reads as under:

“22. In the present case, the AO held that sec.80JJAA was restricted to additional wages paid to employees who have worked for more than 300 days during the relevant period irrespective of whether they were employed on a permanent basis or otherwise.

Accordingly, the AO ascertained the additional wages paid to those workers who had worked for less than 300 days of Rs.25,64,771/- and 30% of which worked out to Rs.7,69,431/- was disallowed by the AO. The claim of the assessee is this that if the worker is employed on permanent basis then only because in the present year, working days are less than 300 days because he was employed after 66 days from the start of the previous year then no deduction will be available under this section in respect of such workers appointed or employed after that date and therefore, this approach of the AO is not correct.

"12. As regards the merits of the case, regarding claim u/s 80JJAA the section reads as under:-" (I) Where the. gross total income of an assessee being an Indian Company includes any profits and gains derived from any industrial undertaking engaged in the manufacture or production of articles of things there. shall subject to the conditions specified in sub-section (2) be allowed as deduction of an amount equal to 30% of additional wages paid to the new regular workmen employed by the assessee in the previous year for three assessment years including the assessment year relevant to the previous year in which such employment is provided;”

days or more. In view of the above, I am of the view that the AO is justified in restricting the claim of the appellant under the special provisions of Section 80JJAA of the Act, and accordingly, the grounds of appeal

2-10 are rejected.”

4. Against the order of the ld. CIT(A) , the assessee filed appeal before this Tribunal and the Ld.AR argued that the assessee has satisfied all the conditions specified u/s. 80JJAA of the Act being entitled for the deduction. The ld. CIT(A) erred in confirming the order of the AO stating that the deduction u/s. 80JJAA of the Act would be available, if new workmen is employed for 300 days in the previous year relevant to the assessment year. Against the identification of 186 workmen out of 381 workmen, the AO allowed the deduction only in respect of 24 workmen which is grossly unjustified. Referring to page number 174 of the paper book, the ld. AR submitted that the total eligible employees added up to 884, consisting of269 during 2011-12, 234 in 2012 -13 and 381 in 2013-14 and argued that the assessee is eligible for deduction for three years as provided u/s. 80JJAA of the Act on the wages paid to 884 employees. The assessee furnished details of new employees employed during the Financial year 2011-12 to 2013-14 mentioned in page number 174 of paper book. Referring page number 182, the assessee submitted that the assessee is entitled for deduction under section 80JJAA of the Act to the extent of Rs1,23,12,539/- being 30% of additional cost on new the workmen employed in the factory for more than 300 days. Therefore argued that section 80JJAA of the Act provides for deduction, if, the workmen is employed for more than 300 days in a year, even if it is not the year in which it was admitted. The ld. AR relied on the order of this tribunal in the assessee’s own case for the assessment year 2013-14 in I.T.A.

No.2737/Bang/2017 dated 03.04.2019.

In the instant case, the assessee submitted that the assessee is eligible for deduction under section 80JJAA of the Act, if the workmen has employed for more than 300 days irrespective of the year in which they were recruited for three consecutive years, whereas the AO disallowed deduction under section 80JJAA of the Act relating to the workmen who have not completed 300 days in the year under consideration. The identical issue has been considered by the ITAT in the assessee’s own case for the assessment year 2013-14, and held that the assessee is eligible for deduction under section 80JJAA of the Act.,on additional wages paid to the new regular workmen employed in the financial year relevant to the assessment year 2012-13 provided they continue to be qualified under the regulation of regular workmen. We extract the relevant part of the tribunal order in the assessee’s own case for the sake of clarity, which reads as under:

workmen employed in Financial years relevant to AY 2011-12, 2012-13 and 2013-14, provided they continue to qualify under the definition of “regular workman” during this year also.

6.1 Therefore, we consider it is deem it fit to remit the matter back to the file of AO to examine the issue in the light of the decision of this Tribunal and direct the AO to allow the deduction as per the direction given in the order supra. The assessee has to furnish the details of new workmen employed and the additional wages incurred before the AO. Accordingly, the order of the lower authorities are set aside and the issue is remitted back to the file of the AO to decide the issue afresh on merits and the assessee is free to make all the claims before the AO. Accordingly, the appeal of the assessee on this ground is allowed for statistical purpose.

The assessee explained before the AO that the payment made by the company is not chargeable to tax in India therefore; the question of deduction of tax at source u/s 195 of the Act does not arise. The assessee further explained that it has no business connection as defined u/s. 9(1)(vii) of the Act and the marketing commission is not in the nature of fee for technical services and Indo maritius treaty does not contain any provision regarding the taxability of Fee for technical services and the taxability of impugned commission is governed by the provisions related to the business income and in the absence permanent establishment in India the payment of commission is not liable to taxed in India.

Thus, argued that TDS provisions are not applicable in assessee’s case. On receipt of reply objecting the disallowance u/s 40(a)(i), the AO issued notice under section 142(1) calling for the details of invoices for marketing commission paid and the details of marketing services rendered by the holding company.

The assessee company also furnished the agreement evidencing that the holding company was appointed as marketing representative for promotion of readymade garments manufactured by the assessee company for sale in overseas market. From the details submitted by the assessee the AO observed that the assessee has not submitted any details to establish that the M/s.

Aquarelle International Ltd (AIL) has rendered the marketing services, thus held that the payment made to M/s. Aquarelle International Ltd. is a colourable device to inflate the expenses of the assessee company to reduce its tax liability therefore the genuineness of the commission to M/s. Aquarelle International Ltd. was held to be not proved hence, disallowed the expenditure under section 37 (1) of the Act.

7.1. Without prejudice to the finding of the AO that the payment was not genuine the AO also disallowed the expenditure alternately under section 40(a)(ia) of the Act, holding that the commission paid was in the nature of fee for technical services and the assessee required to deduct the tax at source u/s 195 of the Act. Since the assessee failed to deduct the tax at sources the AO made the addition u/s 40(a)(i) of the Act.

8. Against the order of the AO, the assessee went on appeal before the Ld. CIT(A). Before the Ld. CIT(A) the assessee filed additional evidence which was rejected by Ld. CIT(A). However, the Ld.CIT(A) viewed that the additional evidence filed by the assessee was relevant and held that the additional evidences did not establish the role of the M/s. Aquarelle International Ltd., in rendering the marketing services warranting the payment of commission. At most the documents indicate that the M/s. Aquarelle International Ltd. is an associated concern. For justifying the payment of commission the marketing support services has to be much more organized and result oriented and the sustainable basis. On the basis of evidences produced by the assessee the Ld. CIT(A) accepted the view of the AO and confirmed the order of the AO.

8.1. With regard to the disallowance under section 40(a)(ia) of the Act, the Ld. CIT(A) confirmed the order of the AO. Against which the assessee filed this appeal before this Tribunal.

9. During the appeal hearing, the Ld. AR submitted that the Ld. CIT(A) has rejected the additional evidences filed by the assessee. Having rejected the additional evidence filed by the assessee, the Ld. CIT(A) ought not to have acted upon the additional evidences placed by the assessee to reach the conclusion that payment made to the holding company was not genuine. Further, the Ld. CIT(A) did not give any opportunity to the assessee before rejecting the additional evidences and even not referred the matter to the AO for remand.

Therefore, argued that the Ld. CIT(A) erred in rejecting the application filed by the assessee for admission of additional evidence. Therefore, the order of Ld. CIT(A) is bad in law and the Ld. CIT(A) ought to have examined the entire additional evidence before rejecting. The ld. AR further submitted that the AO was given a notice for making the addition under section 40(a)(ia) of the Act for non deduction of tax at source and on explanation submitted by the assessee objecting for the disallowance, the AO called for the details of the commission payment by notices under section 142(1) of the Act and given a finding with regard to genuineness of the payments of commission and the services rendered by the M/s. Aquarelle International Ltd., Mauritius, which is apparently contradicting to the issues raised for and conclusions drawn by the AO.

8.2 The Ld. AR further brought to our notice that, AO in his order though made the disallowance under section 37(1) of the Act given a finding that the payment was given to the non-resident by the assessee to promote the assessee’s product in the overseas market as per the agreement and the agent rendered services abroad and have solicited orders but the right to receive the commission arose in India when the orders were executed by the assessee in India. From the order of the AO, the Ld. AR argued that though the AO disallowed the commission disbelieving the genuineness of the services rendered by the foreign entity, in the subsequent paragraphs, the AO himself had acknowledged the genuineness of the payment of commission and also the services rendered by the foreign agent in marketing the products of the assessee company. Thus, argued that the reasons for making disallowance under section 37(1) of the Act and the finding given by the AO for disallowance u/s 40(a)(i) are apparently contradictory. Referring page No.208 of the paper book, the Ld. AR submitted that M/s. Levi Strauss SA (Pty) Ltd. Co. has addressed a letter to the M/s. Aquarelle International Ltd., acknowledging services rendered by the Indian company on introduction by the M/s. Aquarelle International Ltd. In page Nos.210 to 214, the Ld. AR submitted the mails and invoices etc. support the services rendered by the company to the assessee and furnished the copy of application made before the Ld. CIT(A) requesting for admission of additional evidence under rule 46A of the Income Tax Rules, 1962.

As per the application made before the Ld. CIT(A), the AO passed the order without giving sufficient opportunity to the assessee, therefore requested the Ld.CIT(A) to admit the additional evidence. Accordingly, argued that the Ld. CIT(A) ought to have considered the additional evidence and details of filed by the assessee and allowed the appeal of the assessee.

8.3 On the other hand, the Ld. DR argued that the AO has given sufficient opportunities and the Ld. CIT(A) has considered the issues in detail, hence, requested to uphold the order of the Ld. CIT(A).

9. We have heard the rival submissions and perused the material placed on the record. From the order of AO we find that the AO has made the addition of Rs. 4,76,55,888/- under section 37(1) of the Act and also invoked the provisions of section 40(a)(ia) of the Act. With regard to the disallowance made under section 37(1) of the Act, the AO issued the notice under section 142(1) of the Act directing the assessee to establish the marketing services rendered by the assessee and made the addition holding that the assessee did not establish the marketing services rendered by the holding company M/s. Aquarelle International Ltd. However in subsequent paragraphs though without prejudice, the AO made the addition under section 40(a)(ia) of the Act. While making the disallowance under section 40(a)(ia) of the Act the AO made the observation that payment was genuine and the agents have rendered the services. Therefore, as rightly argued by the Ld. AR there was a contradictory finding in respect of the services rendered by the foreign agent to the assessee. The Ld. CIT(A) rejected the application of the assessee for admission of additional evidence, however, the Ld. CIT(A) reached conclusions on the basis of additional evidence produced by the assessee, without even calling for the remand report. Having rejected the application for admission of additional evidence the Ld. CIT(A) ought not to have placed reliance on the same additional evidence for concluding that the M/s.

Aquarelle International Ltd., has not rendered the marketing services to the assessee. The Ld. CIT(A) also ought to have called for the remand report and made verification of the facts submitted in the additional evidence before taking the additional evidence as basis for coming to conclusions. Therefore, we are of the considered view that the entire issue needs to be re-examined by the AO to establish whether the M/s. Aquarelle International Ltd. has rendered the services for receipt of commission or not and whether the payment is in the nature of technical services or not. Hence we remit the matter back to the file of the AO to examine the entire issue and decide the issue afresh on merits.

Accordingly, we set aside the order of the AO for denovo consideration.

Accordingly, the appeal of the assessee is allowed for statistical purposes.

Order pronounced in the open court on 20th December, 2019.