DCIT 2(2), MUMBAI vs. KNIGHT FRANK (I) P. LTD, MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES “A”, MUMBAI BEFORE SHRI G.S. PANNU (VP) AND SHRI RAM LAL NEGI (JM) Assessment Year: 2009-2010 M/s Knight Frank (I) Pvt. Ltd., The Addl. Commissioner of C/o Kalyaniwalla & Mistry, Income Tax – 2(2), Army & Navy Building, Room No. 548, 5th Floor, 3rd Floor, 148 M.G. Road, Fort, Vs. Aayakar Bhavan, M.K. Marg, Mumbai - 400001 Mumbai PAN: AAACK1544J (Appellant) (Respondent) & Assessment Year: 2009-2010 The DCIT – 2(2), M/s Knight Frank (India) Pvt. Ltd. Room No. 545, Paville House, Near Twin Towers, Aayakar Bhavan, M.K. Road, Off. Veer Savarkar Marg, Mumbai - 400020 Vs. Prabhadevi, Mumbai - 400025 PAN: AAACK1544J (Appellant) (Respondent) Assessee by : Shri M.M. Golwala & Amey Wagle (AR) Revenue by : Shri Rajesh Kumar Yadav & S.K. Mishra (DR) Date of Hearing: 21/12/2018 Date of Pronouncement: 18/03/2019

O R D E R PER RAM LAL NEGI, JM These are the cross appeals filed by the assessee and the revenue against the order dated 14.01.2013 passed by the Ld. Commissioner of Income Tax (Appeals)-5, Mumbai, for the assessment year 2009-2010, whereby the Ld. Assessment Year: 2009-2010

CIT (A) has partly allowed the appeal filed by the assessee against assessment order passed u/s 143 (3) of the Income Tax Act, 1961 (for short ‘the Act’). 2. Brief facts of the case are that the assessee company an international property Consultant, rendering real estate advisory and property management services, filed its return of income for the assessment year under consideration declaring the total income at Rs. 9,02,26,830/-. The case was selected for scrutiny and after hearing the assessee assessment order u/s 143 (3) was passed determining the total income at Rs. 6,69,00,970/-, after making addition of Rs. 66,74,134/-, on account of treating service tax under section 43B of the Act, AIR ITS, TDS difference and disallowance made u/s 40(a)(ia) of the Act. The assessee challenged the assessment order before the Ld. CIT (A). The Ld. CIT (A) partly allowed the appeal of the assessee. However, confirmed the additions made by the AO. The Ld. CIT(A) further held that section 43B is a separate provision, it has nothing to do with the additions u/s 145A and as such does not come into play so for as the additions u/s 145A is concerned.

appellant, as is statutorily required under section 251(2) of the Income Tax Act. 4. Having regard to the facts and circumstances of the case and the provisions of law, the appellant submits that the Assessing Officer be directed to delete the addition made to the total income on account of service tax. 5. The learned Commissioner of Income Tax (Appeals) erred in not deleting the addition of Rs. 8,18,113/- on account of AIR difference.

(A) ought to have set aside the assessment order. The Ld. counsel further submitted that the service tax is not tax duty, cess or fee paid qua the assessee. Therefore, the provisions of section 145A do not apply to the service tax. It has been mentioned in the audit report of the assessee that in accordance with the method of accounting regularly followed by the company, service tax recovered for payment to government is not routed through the profit and loss account but is debited/credited directly to the ‘Service Tax Account’. The Ld. counsel further pointed out that this issue is covered in favour of the assessee by the order of the ITAT rendered in the assessee’s own case for the A.Y. 2007-08 and ITA No 6286/Mum/2011 for the AY 2008-09. The Ld. counsel further submitted that Hon’ble Bombay High Court has confirmed the findings of the Tribunal in department’s appeal ITA No. 247 and 255 of 2014. 5. The Ld. Departmental Representative (DR) admitted that this issue is covered in favour of the assessee by the order of the ITAT and the order of the Hon’ble Bombay High Court, however, supported the orders passed by the authorities below. 6. We have perused the material on record. We notice that the coordinate Bench has decided the identical issue in favour of the assessee in the assesse’s own case for the A.Y. and 2008-09 (supra). The relevant portion of the order passed by the coordinate Bench reads as under:- “7. Before us, the AR pointed out that the issue has been dealt with by the Hon’ble Delhi High Court in the case of CIT vs. Nobel & Hewitt (I) Pvt. Ltd., reported in 305 ITR 324 and ACIT vs Real Image Media Technologies Pvt. Ltd. reported in 306 ITR 106 (AT-Chennai). In this case, the coordinate Bencvh held, “that service provider was merely acting as an agent of the Assessment Year: 2009-2010

Government and was not entitled to claim deduction on account of service tax. Since, service tax was not payable by the assessee, rigour of section 43B of the Act could not be applied to the case of assessee …..” In effect, the mischief of section 145A and 43B, does not hit the assessee, therefore the addition ought to be deleted.

Ltd., however could not explain the difference in respect of the remaining three parties. As alleged by the assessee since the AO did not provide the break-up in respect of the three companies despite request made by the assessee, the assessee could not explain the same before the authorities below. We further notice that the AO has made addition on the basis of the AIR data without conducting any further enquiry. The facts of the decision relied upon by the assessee is different from the facts of the present case. Under these circumstances, we are inclined to agree with the Ld. CIT (A) that the AO has made the addition without giving adequate opportunity to the assessee. Hence, we endorse the findings of the Ld. CIT (A) and direct the AO to verify the fact and pass a speaking order after affording opportunity of being heard to the assessee. 12. Ground No. 6 to 10 pertain to disallowance of referral fees for non- deduction of tax. During assessment proceedings, it was noticed that the assessee had paid an amount of Rs. 23,44,138/- to M/s Newmark Knight Frank, Newyark (NKF) without deducting TDS. Accordingly, the AO asked to explain as to why the entire amount should not be disallowed u/s 40(a)(ia) of the Act. The assessee contended that fees paid case is covered by Circular No. 786 of 2000 dated 07.02.2000 issued by the CBDT therefore, the tax was not required to be deduct tax at source. AO rejecting the contention of the assessee disallowed the said amount and added the same to the income of the assessee. In the first appeal, the Ld. CIT (A) upheld the findings of the AO.

“The deduction of tax at source under section 195 would arises if the payment of commission to the non-resident agent is chargeable to tax in India. In this regard attention to CBDT Circular No. 23 dated 23.07.1969 is drawn, where the taxability of ‘Foreign Agents of Indian Exporters” was considered along with certain other specific situations. It had been clarified then that where the non-resident agent operates outside the country, no part of his income arises in India. Further, since the payment is usually remitted directly abroad it cannot be held to have been received by or on behalf of the agent in India. Such payments are therefore held to be not taxable in India. The relevant sections, namely section 5(2) and section 9 of the Income Tax Act, 1961 not having undergone any change in this regard, the clarification in Circular No. 23 shall prevails. No tax is therefore deductible under section 195 and consequently the expenditure on export commission and other related charges payable to a non-resident for services rendered outside India becomes allowable expenditure. On being apprised of this position, the Comptroller & Auditor General have agreed to drop the objection referred to above.”

said case, the AO disallowed payment made to non-resident without deducting tax at source in view of the explanation inserted under section 9 by Finance Act, 2010 with retrospective effect from 1.6.1976, disallowance was held not justified for the reasons that the assessee could not have visualized to deduct tax in absence of any provision particularly in view of the fact that there was already prevailing the law laid down by the Hon’ble Supreme Court in the case of Ishikawajma-Harima Heavy Industries Ltd. vs. DIT 288 ITR 408, wherein it was held that services rendered outside India would be taxable in India only if such services had been utilized in India. The Ld. counsel also relied on the decision of the Hon’ble Madras High Court in the case of CIT vs. Faizan Shoes Pvt. Ltd. 48 taxmann.com 48 (Madras) in support of the contention of the assessee. 15. On the other hand, the Ld. DR relying on the order passed by the Ld. CIT (A) submitted that in view of the explanation to section 9 of the Act, there is no infirmity in the order passed by the Ld. CIT (A). Since, the findings of the Ld. CIT (A) are based on the provisions of law, there is no merit in the contention of the assessee. 16. We have heard the rival submissions of the parties and also perused the material on record including the cases relied upon by the assessee. We notice that the AO has made disallowed u/s 40(a)(ia) holding that Circular No. 786 is not applicable to the case of assessee as the nature of payment was not export commission and the charges payable is for services rendered in India and not outside India. The Ld. CIT (A) has confirmed the disallowance on the basis of explanation to section 9 inserted by Finance Act, 2010 with retrospective effect from 01.06.1976. We notice that the Hon’ble jurisdictional High Court in the case of CIT vs. Gujarat Reclaim and Rubber Products (supra) has dismissed the appeal of the revenue in which the revenue had raised the similar ground. In the said case, the respondent/assessee had made payment of commission to non-resident agent in respect of sales made outside India during two Assessment Year: 2009-2010

assessment years. The AO made disallowance u/s 40(a)(i) of the Act for not deducting tax at source on the ground that the circulars No. 23 of 1969 and 786 of 2000 issued by the CBDT which had clarified that commission paid to non-resident agent does not give rise to income had been withdrawn by Circular No. 7 dated 2009. The CIT (A) upheld the action of the AO in respect of the assessment year 2007-08, however, deleted the disallowance in respect of the appeal pertaining to A.Y. 2008-09 holding that the commission agent did not have any business connection in India. The assessee and the revenue preferred the appeal against the findings of the Ld. CIT (A) before the Tribunal. The Tribunal held that the provisions of section 40(a)(i) would have no application for both the assessment years. The said order was further challenged by the revenue before the Hon’ble High Court. The Hon’ble High Court did not entertain the appeal of the revenue. The operative part of the order reads as under:- “This Circular of 1969 was admittedly in force during the two Assessment Years. It was only subsequently i.e. on 22nd October, 2009 that the earlier Circular of 1969 and its reiteration as found in Circular No. 786 of 2000 were withdrawn. However, such subsequent withdrawal of an earlier Circular cannot have retrospective operation as held by this Court in UTI v/s P.K. Unny and Others 249 ITR 612. (i) In view of the above, not only the entire issue stands concluded in favour of the Respondent-Assessee in the present facts by the CBDT Circular Nos. 23 of 2969 and 786 of 2000 which were in force during the subject Assessment Years but also by the decision of the Apex Court in Toshoku Ltd. (supra) in favour of the Respondent-Assessee. Thus, no substantial question of law arises in the question framed for our consideration. Accordingly, Question (a) not entertained.”

explanation inserted u/s 9 by Finance Act, 2010 with retrospective effect from 01.06.1976 is not justified as the assessee could not have visualized to deduct tax at source in the absence of any provision at the time of making payment. The operative part of the order reads as under:- “5. We have heard the rival contentions and also perused the relevant findings given in the impugned order. It is an undispute4d fact that the assessee has made payment to HGSL which is a non-resident company based at Switzerland. The payment has been made for training conducted by the HGSL to its delegates outside India. It is an admitted fact here that neither the service have been rendered in India nor such services have been utilized aggregating to Rs. 33,93,493/- (on the balance amount TDS has been deducted), on the ground that, such payment relate to services rendered outside India. The revenue’s case is that, in view of the Explanation brought in the statute with retrospective effect form 1st June, 1976 and such an Explanation is clarificatory in nature which now provides that the income of a non-resident shall be deemed to accrue in India under clause (v) or clause (vi) or clause (vii) of sub-section (1) of section 9 and shall be included to the total income of the non-resident, whether or not the not the non- resident has resident (sic) or place of business or business connection in India or a non-resident has rendered services in India. Though, such an amendment has been brought in the statute with retrospective effect but a the time of making the payment there was no such provision under the Act and in fact, the law of the land as laid down by the Hon’ble Supreme Court was that, if the services has not been rendered in India and such services are not utilized in India then there is no liability for deducting TDS. The amendment has been brought specifically to negate the decision of Hon’ble Supreme Court. An assessee who has to make the payment cannot visualize or apprehend that in future a retrospective amendment would be brought whereby it would require withholding of tax. Even if the purported amendment has been brought with the intention to clarify the provision but there was no such judicial interpretation that payments made to non-residents for Assessment Year: 2009-2010

rendering of services in India is taxable in India in absence of any business connection in India or PE in India and in the absence of any clear-cut law, assessee cannot beheld to be liable to deduct TDS. It is a trite legal maxim. “lex non cogit ad impossiblia” which means that the law cannot possibly compel a person to do something which is impossible to perform. Thus, we hold that, at the time of making the payment, assessee could not have visualize to deduct TDS when there was no provision under the Act and in fact, there was a already prevailing law laid down by the Hon’ble Supreme Court that in such a case, no TDS was to be deducted, the obvious conclusion is that on such payment no disallowance under section 40(a)(i) can be made. If the view and contention raised by the revenue is to be accepted that such a law fixing the liability on the assessee is to be reckoned from retrospective date, then it will cause not only great hardship and injustice but also prejudice to the assessee. Accordingly, we hold that, disallowance under section 40(a)(i) on account of any retrospective amendment is wholly vitiated and cannot be sustained. Accordingly, ground raised by the assessee is allowed.”

court rendered in the case of UTI vs. Unny and others 249 ITR 612, subsequent withdrawal of an earlier Circular cannot have retrospective operation. So far as the retrospective effect of the Explanation to section 9 is concerned, The coordinate Bench has held that disallowance on the basis of Explanation to section 9 of the Act inserted by Finance Bill 2010 with retrospective effect from 01.06.1976 was bad in law as the assessee could not have visualized to deduct the tax in the absence of any such provision at the time of making payment. Hence, in the light of the judgments of the Hon’ble High Courts and the coordinate Bench of the Tribunal discussed above, we set aside the findings of the Ld. CIT(A) and allow this ground of appeal of the assessee and further direct the AO to delete the addition. 20. Ground No 11 not pressed hence dismissed as not pressed. The revenue has raised the following effective grounds of appeal against the impugned order passed by the Ld. CIT (A):-

rendered in the assessee’s own case for the A.Y. 2011-12. Since, the Tribunal has confirmed the order passed by the Ld. CIT (A), there is no merit in the appeal of the revenue. 3. On the other hand, the Ld. DR did not controvert the fact that the Tribunal has decided the identical issue in favour of the assessee in the assesse’s own case. However, the Ld. DR supported the assessment order. 4. We have heard the rival submission and also perused the material on record including the case relied upon by the assessee. The coordinate Bench has decided the identical issue in favour of the assessee in the assessee’s own case ITA NO. 5335/Mum/2015, A.Y. 2010-11 holding as under:-

“4. At the time of hearing, the Ld. Representative for the assessee submitted that similar issue has come up before the Tribunal for assessment years 2007-08 and 2008-09 vide ITA Nos. 2021/Mum/2011 and 6286/Mum/2011 respectively and vide order dated 10/07/2013, Tribunal has decided the issue in favour of the assessee. The Ld. Representative for the assessee has also submitted that the order of the Tribunal has also affirmed by the Hon’ble Bombay High Court in Income Tax Appeal No. 247 & 255 of 2014 vide order dated 16th August, 2016. Therefore, he pleaded that for this year also the issue may be decided in favour of the assessee. 5. On the other hand, the Ld. Departmental Representative did not controvert the submissions of the assessee, however, supported the order of the Assessing Officer. 6. We have carefully considered the rival submissions. We find that the issue is covered in favour of the assessee and against the Revenue by the decision of the Tribunal, cited above, in assessee’s own case for assessment years 2007-08 and 2008-09 vide order dated 10/07/2013 (supra) and the same has been affirmed by the Hon’ble Bombay High Court vide order dated 16th August, 2016 (supra). In view of the above, we find no reason to interfere with the order passed by the CIT (A) and the same is hereby affirmed. We order accordingly.” Assessment Year: 2009-2010

Order pronounced in the open court on 18th.March, 2019. (G.S. PANNU) (RAM LAL NEGI) VICE PRESIDENT JUDICIAL MEMBER

म ुंबई Mumbai; दिन ुंक Dated: 18/03/2019 Alindra PS आदेश प्रतितिति अग्रेतिि/Copy of the Order forwarded to : 1. अपील र्थी / The Appellant 2. प्रत्यर्थी / The Respondent. 3. आयकर आय क्त(अपील) / The CIT(A)- 4. आयकर आय क्त / CIT 5. दिभ गीय प्रदिदनदि, आयकर अपीलीय अदिकरण, म ुंबई / DR, ITAT, Mumbai 6. ग र्ड फ ईल / Guard file.

आदेशानुसार/ BY ORDER, सत्य दपि प्रदि //// उि/सहायक िंजीकार (Dy./Asstt.