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Income Tax Appellate Tribunal, DELHI BENCH ‘E’ NEW DELHI
Before: SHRI SUDHANSHU SRIVASTAVA & SHRI O.P. KANT
PER SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER: This appeal is preferred by the department against the order dated 9.7.2014 passed by the Ld. Commissioner of Income Tax (Appeals)-IX, New Delhi for assessment year 2010-11.
2.0 Brief facts of the case are that the assessee company is engaged in the business of providing technical and management consultancy services. The return of income was filed declaring the taxable income at nil. The assessment u/s 143(3) of the Income Tax Act, 1961 (hereinafter called ‘the Act’) was completed at Rs. 1,14,71,230/- after making the following additions and disallowances:- i) Export commission disallowed - Rs. 70,48,237/- ii) Disallowance for provision of gratuity - Rs. 9,80,192/- iii) Salary and rent paid in UK - Rs. 17,56,116/- iv) Disallowance u/s 14A` - Rs. 2,43,148/- 2.1 Proportionate disallowance on foreign travel expenses to the tune of Rs. 36,09,459/- was also made. Some other additions and disallowances were also made on account of long term capital gain and interest paid on advance tax liability. The assessee approached the Ld. First appellate Authority who partly allowed the assessee’s appeal by giving relief by deleting addition of Rs. 17,56,116/- being salary and rent paid in UK. The Ld. Commissioner of Income Tax (Appeals) also deleted the addition of Rs. 70,48,237/- being export commission paid were disallowed u/s 40a(i) of the Act. Ld. Commissioner of Income Tax (Appeals) also provided relief to the assessee by deleting the addition of Rs. 36,09,459/- on account of foreign travelling expenses. Now, the department is before the ITAT and has challenged these three deletions made by the Ld. Commissioner of Income Tax (Appeals).
3.0 The Ld. Senior Departmental Representative (Sr. DR) submitted that as far as the deletion of addition of Rs. 17,56,116/- being salary and rent paid in UK was concerned, the Ld. Commissioner of Income Tax (Appeals) did not consider the fact that the identity of the persons to whom these payments were made was not established. It was also submitted that the Ld. Commissioner of Income Tax (Appeals) had drawn an incorrect conclusion that the persons to whom the salary and rent were paid were not chargeable to tax in India.
3.1 With respect to the second issue pertaining to deletion of disallowance of Rs. 70,48,237/- u/s 40a(i), it was submitted that the payment of export commission have been made without deduction of tax at source although Explanation to Section 9 of the Act provided that the income of non-resident was to be deemed to accrue or arise in India, irrespective of the fact whether the non-resident had a residence or place of business connection in India or whether or not the non-resident had rendered services in India. It was submitted that this amendment was inserted by Finance Act, 2010 w.e.f. 1.6.1976 3 and was applicable to clause (v), (vi) and (vii) of section 9(1) of the Act.
3.2 With respect to the third issue regarding deletion of addition of Rs. 36,09,459/- pertaining to proportionate disallowance of foreign travelling expenses, it was submitted that the Assessing Officer had rightly disallowed the expenses in proportion to the business earning of the two units of the assessee and further, the assessee had deliberately not claimed the expenses in the exempted unit and had claimed the entire expenses of the foreign tours in the unit which was liable to pay taxes apparently to evade payment of taxes.
4.0 In response, the Ld. Authorised Representative (AR) submitted that the first issue regarding deletion of addition pertaining to salary and rent paid to persons in UK was covered by the order of the ITAT in assessee’s own case in assessment year 2009-10 in ITA No. 4497/Del/2013.
4.1 With respect to the second issue pertaining to deletion of disallowance u/s 40a(i) on account of commission paid to foreign agents, it was submitted that this issue was also covered in favour of the assessee in assessee’s own case by order of the Tribunal for assessment year 2011-12 in ITA No. 1207/Del/2016.
4.2 With respect to the third issue i.e. deletion of proportionate disallowance out of foreign travelling expenses, the Ld. AR submitted that there was no revenue loss to the department as has been alleged by the department. It was submitted that the assessee had maintained separate books of accounts for both the tax-exempt and the tax-paying entity and further the assessee has also paid tax on book profits u/s 115 JB of the Act and, therefore, the contention of the department that the assessee has benefitted by booking bogus expenses against non exempted unit is incorrect. It was prayed that the department’s appeal be dismissed.
5.0 We have heard the rival submissions and perused the material available on record. It is seen that the first issue regarding deletion of disallowance of Rs. 17,56,116/- is squarely covered in favour of the assessee by the order of the ITAT in assessee’s own case for assessment year 2009-10 vide order dated 15.1.2016 in wherein the relevant observations and findings are contained in Para 7 of the said order. The same is being reproduced here-in-under for a ready reference:-
“We have carefully heard the rival contention. According to the AO as per the provision of section 40a(iii) any salary paid which Is chargeable to tax and is paid outside India to a non resident is disallowable if no tax is deducted thereon. Therefore salary paid to Mr. Brara, disallowed. As per assessee Mr. Brara is an employee of the company has not worked in India and therefore admittedly provision of section 5 (2) shall not be applicable to him and it is admittedly such salary is not received or accrued to him in India. Only aspects required to be examined is whether the salary was paid would be chargeable to tax as income u/s 9(l)(ii) only. According to that section income earned in India is deemed to accrue or arise in India and is chargeable to tax in the hands of the non-resident if it is earned in India. As per the explanation to that section the service rendered in India shall be regarded as income.earned in India. In this case it is admitted fact that the employee did not render any service in India and hence the deletion of disallowance of Rs. 1684727/- made by the AO is correct. We confirm the order of learned Commissioner of Income tax (Appeals) on this ground.”
5.0.1 The Ld. Sr. DR could not point any distinguishing fact in the year under appeal from assessment year 2009-10.
Accordingly, respectfully following the decision of the Coordinate Bench in assessee’s own case as aforesaid, we dismiss ground no. 1 and 2 of the department’s appeal.
5.1 Similarly, it is seen that the second issue i.e. deletion of Rs. 70,48,237/- which had been made u/s 40a(i) of the Act is 6 also covered in favour of the assessee in assessee’s own case for assessment year 2009-10 in order dated 15.1.2016 in ITA No. 4497/Del/2013. This order of the Tribunal was also followed in assessee’s own case for assessment year 2011-12 vide order dated 31.10.2017 in ITA No. 1207/Del/2016. The relevant observations of the ITAT in assessment year 2009-10 are contained in Para 11 and 12 and the same are being reproduced here-in-under for a ready reference:-
“11. We have carefully considered the rival contentions. Firstly It is an admitted fact that assessee has paid commission to Mr. Ish Brara for rendering services in USA. It is also not in dispute that he has provided services to the company outside India and no part of services have been rendered in India. Further there is no clarity on the amount of commission paid on which provisions of section 40a (i) is applied by Id AO. At some part of the order the amount is mentioned as Rs. 21,83,306/- and ultimately the amount disallowed is Rs. 7395110/-. For verification of this amount CIT (A) has set aside the issue for determination of amount to the file of AO. On merits CIT (A) has held that as the services have been rendered outside India and no part of services are rendered in India by nonresident. According to the provision of section 5 (2) rws 9 (1) of the Income Tax Act this sum is not chargeable to tax in India. Now the revenue has raised the ground that by virtue of introduction of explanation to section 9 w.e.f. 1.6.1976 by the Finance Act 2010 it is provided that irrespective of residence or place of business or business connection in India of Non resident and irrespective of whether services have been rendered India or not , for interest, Royalty and fees for technical services shall not be relevant. Identical issue has been considered by the coordinate bench in Deputy Commissioner of Income-tax, Circle-52, Kolkata v. Subhotosh Majumder [2016] 65 taxmann.com 42 (Kolkata - Trib.) where in following the decision of Honourable Delhi high court in CIT v. Angelique International Ltd. [2013] 359 ITR 9/219 Taxman 104/38 taxmann.com 425 (Delhi) has held that:- "20. From the above facts and circumstances of the case and also precedents cited above, we are of the view that till amendment in Explanation to sec. 9(2) oj the Act. the prevailing legal position was that unless the technical services were rendered in India, the fees for such services could not be brought to tax under Section 9(l)(vii) of the Act. The law amended was undoubtedly retrospective in nature hut so far as tax withholding liability is concerned, it depends on the law as it existed at the point of time when payments, from which taxes ought to have been withheld, were made. The tax deductor is not expected to know how the law will change in future. A retrospective amendment in law does change the tax liability in respect of an income, with retrospective effect, but it cannot change the tax withholding liability, with retrospective effect. The tax withholding obligations from payments to non-residents, as set out in Section 195 of the Act, require that the person making the payment "at the time of credit of such income to the account payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income tax thereon at the rates in force". When these obligations are to be charged at the point of time when payment is made or credited, whichever is earlier, such obligations can only be discharged in the tight of the law as it stands that point of time. Section 40(a)(i) of the Act provides that inter alia, notwithstanding anything to the contrary in sections 30 to 38 of the Act, any amount payable outside India, or payable in India to a non-resident, shall not be deducted in computing the income chargeable under the head "profits and gains of business or profession" on which tax is deductible at source wider Chapter XVII-B and such tax has not been deducted. Accordingly, the assessee cannot be faulted for not deducting TDS and consequently, the deletion of disallowance by CTT (A) is confirmed. This common issue of all the three appeals of revenue is dismissed. "
Concurring with the views of coordinate bench, we also hold that assessee cannot be held to be liable to deduct tax at source relying on the subsequent amendments made in the Act with retrospective effect. In this case, Explanations to sec. 9(2) was inserted by the Finance Act, 2010 with retrospective effect from 1.6.1976 and it was impossible for the assessee to deduct tax in the financial years 2008-09 relevant to AY 2009-10 when as per the relevant legal position prevalent in that year, the obligation to deduct tax was not on the assessee. Law cannot compel a person to do something, which is impossible to perform. Our view also gets support from decision of Honourable supreme court in case of Krishnaswomy S. Pd v. Union of Indio [2006] 281ITR 305/151 Taxman 286, wherein the said legal Maxim was accepted by the Hon'ble Supreme court as under:- “17. The maximum of equity, namely, actus curiae neminem gravabit - an act of court shall prejudice no man, is founded upon justice and good sense which serves a safe and certain guide for the administration of law. The other relevant maxim is, lex non cogit ad impossibilia - the law does not compel a man to do what he cannot possibly perform. The law itself and its administration is understood to disclaim as it does in its general aphorisms, all intention of compelling impossibilities, and the administration of law must adopt that 7.- general exception in the consideration of particular cases - UP SRTC v. Imiiaz Hussain [2006] 1 SCC 380, Shaikh Salim Haji Abdul Khagumsab v. Kumar [2006] 1 SCC 46, Mohammad Gazi v. State of MP [2000] 4 SCC 342 and Gvrsharan Singh v. New Delhi Municipal Committee [1996] 2 SCC 459."
5.1.1 As no distinguishing fact has been brought to our notice by the Ld. Sr. DR on this issue, respectfully following the order of the Coordinate Bench in assessee’s own case as aforementioned, we dismiss ground nos. 3 and 4 of the department’s appeal.
5.2 Ground no. 5 challenges the action of the Ld. Commissioner of Income Tax (Appeals) in deleting proportionate disallowance of Rs.36,09,459/- incurred in respect of foreign travel expenses. It is seen that the assessee maintains two divisions under which foreign exchange is earned by the assessee. Under Software Export Division (SED), the assessee runs a call center, income from which is claimed as exempt u/s 10A of the Act. Under Technical & Management Consultancy Services Division (TMCD) the assessee recruits manpower for foreign companies for which an office is maintained at London.
The Assessing Officer held that since 90% of the foreign earning was from SED, 90% of the foreign travel expenses should be allocated to the same unit and accordingly 90% of the foreign travel expenses were disallowed. The Ld. Commissioner of Income Tax (Appeals) deleted the disallowance by observing that the assessee had maintained separate books of accounts for both the units and further that the apportionment had no rational basis. The Ld. Commissioner of Income Tax (Appeals) also took due note of the fact that the assessee had paid tax u/s 115JB and thus after paying MAT, the assessee had not benefitted by booking alleged bogus expenses in the non-exempt unit. It was the contention of the assessee before the Ld. Commissioner of Income Tax (Appeals) that no foreign travelling was required in the case of SED because the agent in the USA is paid 15% commission which also covers the USA travelling expenses and no extra expenses were required. It is also undisputed that the assessee had submitted complete details of travelling expenses before the Assessing Officer which contained the names of various organisations visited by the assessee. From the details furnished before the Assessing Officer, it is undisputed that the travelling expenses were for visit to Dubai, Abu Dhabi, UK etc. and since the visit to these areas cannot be linked to SED which deals only with three customers from USA, the visit to these countries could not be linked to expenses incurred for the SED unit. It is seen that the Assessing Officer has made a disallowance without pointing out any specific defect in these details furnished by the assessee and has made only an ad hoc disallowance. The Assessing Officer has also ignored the fact that separate books of accounts were duly maintained and further the assessee has also paid MAT under the provisions of section 115JB and, thus, it could not be said that the assessee stood to benefit by overbooking of foreign travel expenses in the TMCD unit. Therefore, we are unable to interfere with the findings of the Ld. Commissioner of Income Tax (Appeals) on this issue also and we accordingly dismiss ground nos. 5 and 6 of the department’s appeal.
5.3 Ground nos. 7, 8 and 9 are general in nature and do not require any adjudication.
6.0 In the result, the appeal of the department stands dismissed.
Order pronounced in the open court on 27th November, 2018.