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Income Tax Appellate Tribunal, DELHI BENCH “C”: NEW DELHI
Before: SHRI BHAVNESH SAINI & SHRI PRASHANT MAHARISHI
O R D E R PER PRASHANT MAHARISHI, A. M. 1. This is an appeal filed by the revenue against the order of the ld CIT(A)-XV, New Delhi dated 27.10.2014 for the Assessment Year 2010-11. 2. The revenue has raised the following grounds of appeal:- “1. Whether on the facts and circumstances of the case and in law, the ld CIT(A) erred in deleting the addition of Rs. 4,20,00/- made u/s 36(1)(iii) of the Act on account of loans given to the related parties/ corporate bodies without charging any interest.
2. Whether on the facts and circumstances of the case and in law, the ld CIT(A) erred in deleting the addition of Rs. 77110450/- made on account of non-deduction of TDS u/s 195 ignoring the fact that assessee had deducted TDS on part payment but not on balance payment.”
3. Brief facts of the case shows that assessee is a company engaged in the business of production and trading of milk products. It filed its return of income on 13/10/2010 declaring income of Rs. 4539180/-. During the course of assessment proceedings two disallowances were made which are being contested in this appeal. The 1st disallowance is a sum of Rs. 420, 000/– being 12% interest of INR 3,500,000 advanced by the assessee to unrelated parties without charging any interest. The 2nd disallowance is of rupees 7710450 on account of commission paid in foreign exchange, Page | 1 without deduction of tax at source by the assessee. Both this disallowances were deleted by the learned CIT – A, and therefore revenue is in appeal before us. 4. The 1st ground of appeal is with respect to addition on account of inter- corporate interest free loans given by assessee of INR 3,500,000 to unrelated party where the learned AO noted that assessee has taken interest-bearing secured and unsecured loans during the year. The learned assessing officer computed interest at the rate of 12% on the above sum and disallowed INR 42 0000/– on account of interest expenditure claimed by the assessee applying the provisions of section 36 (1) (iii) of the act. The learned CIT – A, held that the advance given was for the purchase of refrigerated vehicle as a business advance. He further held that the out of the total amount of INR 8,500,000 an amount of INR 5,000,000 was duly refunded to the appellant. Even the borrower has given 3 cheques aggregating to INR 3,500,000 to the assessee. However same could not be engaged. Therefore the learned CIT – A, held that it cannot be said that the balance of INR 3,500,000 was given by the assessee to a related concern only for the purpose of claiming interest expenses against the taxable income. He further stated that the source of the advance of INR 8,500,000 given to the related party on 28/6/2008 and on 6/8/2008 respectively. The appellant had sufficient own funds in the bank account and therefore the appellant has paid interest on borrowed funds which were for the purpose of the business and the interest free advances given to the sister concern were not out of the interest-bearing funds.
5. The learned departmental representative vehemently submitted that the assessee has paid huge interest and therefore the amount of advance given to the sister concern free of interest has rightly been taken by the learned AO as diverse of interest-bearing funds. Therefore, the interest was disallowed.
6. The learned authorised representative reiterated the submissions made before the learned CIT – A, which are covered in paragraph number 5.3 of the order of the learned CIT appeal. He further referred to para number 5.4 wherein it has been stated that the above amounts have been given for the purposes of the business. He further stated that the borrower has already Page | 2 issued cheques to the assessees which were not encashed. He also referred to the finding of the learned CIT – A, wherein it has been mentioned that the source of the fund given to the sister concern is not an interest-bearing funds and there is a direct Nexus on the date of funds given by the assessee to the sister concern, which were not interest-bearing funds.
7. We have carefully considered the rival contentions and perused the orders of the lower authorities. In the present case, the learned CIT – A, has given a categorical finding that the amount of INR 3,500,000 were part of the original business advances given by the assessee to the sister concern for the purchase of refrigerated vehicle as a business advance. Even otherwise the finding of the learned CIT – A, cannot be disputed by the learned departmental representative that the above order was given by the assessee out of the door interest-bearing funds. In view of this we do not find any infirmity in the order of the learned CIT – A, in deleting the disallowance of INR 40 20000/– out of the interest expenditure on account of advances given to unrelated party. Accordingly, ground number 1 of the appeal of the revenue is dismissed.
The 2nd ground of appeal
of revenue is with respect to the disallowance of rupees 77110450/– deleted by the learned CIT – A, on account of commission paid to a foreign party without deduction of tax at source. The learned assessing officer noted that the assessee has paid commission of INR 1 0787684/– whereas, in the immediate preceding year it was only INR 20 411259/–. During the year. The total sale of the assessee has been shown at INR 14 11 803429/– whereas, in the immediately preceding year it was INR 12 08904752 and there is a 15.09% increase in turnover during the year, whereas in respect of commission expenses, it has increased by 347.83 percent. The AO noted that the assessee has paid INR 7 8532502, international business network private limited of Nepal. Out of the above payment assessee has deducted tax on INR 14 20 800 at the rate of 40% under section 195 of the income tax act. However, on the balance amount of rupees 7710450 the assessee has not made any tax deduction at source and therefore the learned AO applied the provisions of section 40. (a)(ia) of the act as according to him the tax should have been deducted under section 195 of the income tax act as the recipient of the income was resident Page | 3 of Nepal the assessee explained that the assessee is not required to deduct tax at source on the above sum as the above income is not chargeable to tax in India for the reason that the recipient is a tax resident of the another country and it does not have any permanent establishment in India. The learned AO rejected the above contention of the assessee as assessee could not furnish any detail with respect to the tax resident certificate of the payee and also failed to prove by furnishing the reliable documents to prove that the recipient had no permanent establishments in India. Therefore, he disallowed rupees 7710450/–.
9. On appeal before the learned CIT – A. The above disallowance was deleted wherein he noted that the appellant had entered into an agreement with the international business network the Nepal on 22/04/2009 for promoting the export sales of the assessee in that country the assessee paid 1% of the export sales is a commission to the dairy development Corp, Nepal. The learned CIT – A, held that the above recipient of the income was incorporated in Nepal and no services were rendered by that party in India. He further held that in absence of any article of taxation of fees for technical services and the commission income in the double taxation avoidance agreement between the two countries. The above income can only be taxed under article 7 as business profits. He further held that to tax the business profit in India. The recipient of income should have a permanent establishment. He further held that the services have been provided in Nepal for the purpose of export sale of the appellant’s product to Dairy development Corp Nepal. He therefore, deleted the above disallowance for that reason.
The learned departmental representative vehemently supported the order of the learned assessing officer and submitted that the income has accrued in India and therefore take should have been deducted at source.
The learned authorised representative repeated the submissions made before the learned CIT – A, and further stated that the above issue is squarely covered in favour of the assessee by the decision of the honourable Gujarat High Court in case of principal Commissioner of income tax vs Nova Technocast private limited 94 Taxmann.com 322 (Gujarat).