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Income Tax Appellate Tribunal, G Bench, Mumbai
Before: Shri B.R. Baskaran & Shri Amarjit Singh
Both the appeals of the assessee are directed against the orders passed by Ld CIT(A)-16, Mumbai and they relate to the assessment years 2009-10 and 2011-12. Both the appeals were heard together and hence they are being disposed of by this common order, for the sake of convenience.
The assessee is engaged in the business of manufacturing of textiles through handloom and power looms.
2 & 4222/Mum/2016 M/s. Etco Industries Pvt. Ltd 3. We shall first take up the appeal filed for AY 2009-10, wherein the assessee is assailing the decision of Ld CIT(A) in confirming disallowance of commission expenses paid to a foreign party.
The facts relating thereto are set out in brief. The AO noticed that the assessee has claimed commission expenses of Rs.38.74 lakhs. It was noticed that the assessee has deducted TDS on commission payments of Rs.24.18 lakhs only. Hence the AO disallowed a sum of Rs.14.48 lakhs out of commission expenses u/s 40(a)(ia) of the Act for non-deduction of tax at source. The above said disallowance included commission expenses of Rs.6,26,926/- paid to foreign parties. We are concerned with the disallowance of Rs.6,26,926/- paid to the foreign parties. The Ld CIT(A), apart from confirming disallowance u/s 40(a)(ia), has also observed that the assessee has not furnished any evidence to show that the foreign agents have rendered any service to the assessee.
The Ld A.R submitted that the assessee has exported goods during the year relevant to AY 2009-10 to a concern named M/s Arad Textile Industries Ltd, Tel Aviv, Israel. As per the terms and conditions of export, the above said customer was entitled to deduct 2% of sales value towards commission expenses. The Ld A.R invited our attention to the copy of Letter of Credit obtained by the above said party and submitted that the Letter of credit also clearly shows that the assessee shall get only 98% of the sale proceeds and the remaining 2% shall be paid to local agents. He further submitted that the invoice raised by the assessee also would show that commission of 2% was payable to local agents. Accordingly the Ld A.R submitted that the assessee realised only 98% of the invoice value and hence the remaining 2% was accounted as commission expenses. He further submitted that, in any case, the assessee is not liable to deduct tax at source from the above said commission payment, since the said income is not chargeable to tax in India in the hands of Local agents of Israel.
On the contrary, the Ld D.R supported the order passed by Ld CIT(A).
3 & 4222/Mum/2016 M/s. Etco Industries Pvt. Ltd 7. Having heard rival contentions, we find merit in the contentions of the assessee. The invoice raised by the assessee as well as the Letter of Credit obtained by the customer of the assessee from bank clearly show that 2% commission was payable to local agents. It was submitted that the same was paid as per terms and conditions entered between the parties. In effect, what the assessee realised was only 98% of the invoice value. Even if the assessee was not able to substantiate the nature of services provided by the local agents, the shortage in realisation is allowable as normal business deduction. Since the impugned payment is not chargeable to tax in India in the hands of recipients, the provisions of sec. 40(a)(i) will not apply. Hence we are of the view that there is no reason to disallow the expenses of Rs.6,26,926/- claimed by the assessee. Accordingly we set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete the disallowance of Rs.6,26,926/- referred above.
We shall now take up the appeal filed for AY 2011-12. The first issue urged therein relates to the disallowance of commission expenses. During the year relevant to AY 2011-12, the assessee paid Commission to Israel parties and also certain other parties. The AO disallowed a sum of Rs.23.34 lakhs for non-deduction of tax at source. The Ld CIT(A) confirmed the same by following the decision rendered by him in AY 2009-10.
In the preceding paragraphs, we have deleted the disallowance of commission expenses on the reasoning that the assessee has realised only net amount and further the impugned payments are not liable for deduction of tax at source, since the same is not taxable in India in the hands of recipients. Following the same, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete the disallowance of Rs.23.34 lakhs, referred above.
In AY 2011-12, the assessee is contesting the disallowance made u/s 14A of the Act. The assessee did not earn any exempt income and hence it did not make any disallowance of expenses u/s 14A of the Act. Since the assessee had held investments, the AO disallowed a sum of Rs.1,04,275/- u/s 14A of the Act. The AO adopted the same figure for the purpose of
The Ld A.R placed reliance on the decision rendered by Hon’ble Delhi High Court in the case of Cheminvest Ltd vs. CIT (281 CTR 447) to contend that no disallowance u/s 14A is required to be made as the assessee did not earn any exempt income.
We heard Ld D.R on this issue. We notice that the Ld CIT(A) has placed reliance on the decision rendered by Hon’ble Delhi High Court in the case of Cheminvest Ltd (supra) and also quoted the relevant portion from the said decision. However, instead of deleting the addition, the Ld CIT(A) has confirmed the addition. The Hon’ble Delhi High Court has held in clear terms that section 14A will not apply if no exempt income is received or receivable during the relevant previous year. Accordingly we set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete the disallowance made u/s 14A of the Act.
In the result, both the appeals of the assessee are allowed.
Order pronounced in the open court on 18th June, 2018.