BHARTIYA INTERNATIONAL LTD,NEW DELHI vs. DCIT, CIRCLE-4(2), NEW DELHI

“8. We have carefully considered the rival submissions and perused the orders of the authorities below. The case laws cited have been perused carefully.

9. The disallowance of export commission expenses owing to non-deduction to tax at source on such remittances is in controversy. The assessee-company is engaged in the business of export of leather and textile products. The assessee company has entered into certain international transactions with agents in an overseas jurisdiction to carry out marketing and sales related activities therein. Commission payments have been made for procurement of export orders to various such overseas agents such as Ultima Italia SRL, Italy; World Fashion Trade Ltd, Hong Kong; Trade World Ltd, Hong Kong and several other parties having establishment abroad. The assessing officer has denied deduction of commission expenses for non deduction of TDS on such payments placing reliance on Hical Infra (supra). 9.1 In defense, it is the case of the assessee that commission payments are attributable to procurement of export orders for earning an income outside India and in lieu of services rendered outside India. The overseas agents are not authorized to conclude any contract on behalf of the Indian company and the pricing of the product is also determined by the Indian Company. The overseas agents carried out their assigned activity wholly outside India as a support for procurement of export orders. It is further case of the assessee that the AO in the final assessment order has disallowed such commission expenses aggregating to Rs.11,64,88,755/- solely on the ground that assessee has failed to deduct TDS under section 195 of the Act on commission payments and consequently invoked provisions of Section 40(a)(i) of the Act. For holding so, the AO has branded such commission expenses as ‘fee for technical services’ [chargeable under the Act under source rule of S. 9 of the Act] on the ground that such commission agents are engaged in providing quality checks services while obtaining procurement order which observation is, in turn, based on purported assertions made on behalf of the assessee through Video Conferencing (VC). In rebuttal, the assessee had denied making any such assertions before the DRP as well as in the final assessment stage. The AO has not referred to any documentary evidences including clause in the agreements entered into with overseas agents which places such obligations of quality check on the commission agents. It is well settled that onus lies on the person who alleges as observed in K.P. Verghese vs. ITO (1981) 131 ITR 597 (SC). The Revenue cannot put an impossible burden on the assessee to prove a negative point. The AO has merely relied upon certain assertions purportedly made by the representative of the assessee towards quality check. No evidence has been placed to establish the factum of any such assertions. Be that as it may, such allegations cannot be imputed in the absence of any documentary evidence. The whole basis for making such whopping disallowance is shallow and a damp squib. The assessee has repeatedly asserted that services have been rendered outside India by the overseas agents for procurement of orders without any technical or managerial assistance.

10. Under the circumstances, in the absence of any adverse material, the factual matrix did not provide any scope for taxing such payments. The reasonableness and genuineness of expenses are admittedly not in dispute. It is also not in dispute that commission expense has been incurred wholly and exclusively for the purposes of carrying out of the business of the assessee. Similar expenses incurred by the assessee company in the earlier years have been stated to be allowed in the assessment framed under Section 143(3) as emerging from records. The DRP has also observed that agreements with overseas agent do not signify that any quality checks of the products are carried out by foreign commission agents. Thus, the commission payments cannot be regarded as fee for technical services. Despite such observations, no facts have been brought on record to the contrary in the final assessment order. Thus, in the absence of any services of technical nature, commission payments to selling agents outside India is outside the ambit of provisions of Section 9(1)(vii) r.w. Section 5 of the Act. 9.2 Plethora of judgments govern the field on the issue. Useful reference can be made to the decision rendered by the Co-ordinate Bench in CIT vs. EON Technology P. Ltd., (2011) 15 taxmann.com 391 (Del) and in the case of Prithvi Information Solutions Ltd. Vs. ITO (2014) 47 taxmann.com 214 (HYD.); Well Spring Universal vs. JCIT (2015) 56 taxmann.com 174. 9.3 Under the provisions of s. 195 of the Act, taxes are required to be deducted at source on the payments made to non resident, only if the income payable to the non resident is chargeable to tax in India. The income is chargeable to tax in India in the hands of the non resident where income received or deemed to have been received in India or the income has accrued or arisen or deemed to have accrued or arisen in India. The assessee has appointed several non-resident entities to act as agent for services such as soliciting customers, securing orders, assisting in deliver of goods outside India etc. The commission in the instant case has thus derived its genesis from sales. The property in goods have been transferred in overseas jurisdiction. We thus find force in the plea of the assessee that in the instant case where the overseas agents were paid commission for securing order etc., and such services were utilised for the purpose of making or earning income from a source outside India, the assessee is under no obligation to apply with provisions of Section 195 of the Act for the reasons that commission to such overseas agents are not taxable under the Act. The AO has not alleged or established any thing to the contrary. The AO was thus not justified to disallow such commission expenses under the Act. We thus direct the AO to reverse and cancel the additions on this score.

10. In identical facts and circumstances, the Co-ordinate Bench in assesse’s own case in Assessment Year 2017-18 has dealt with the issue as under:

“11. Ground No.3 concerns a disallowance of Rs.61,64,363/- under Section 14A of the Act. 11.1 In the matter, the ld. counsel for the assessee submits at the outset that the assessee has earned exempt income of Rs.1,01,073/- only during AY 2017-18 in question as evident from the statement of total income and the audited financial statements placed in the paper book. As against such exempt income, the assessee has made suo motu disallowance of Rs.2,52,249/- on the basis of 1% of average value of investment from which tax free dividend income was received. The assessee thus contends that in view of suo motu disallowance which far exceeds the exempt income, no further disallowance is permissible under Section 14A r.w. Rule 8D of the Income Tax Rules, 1963. 11.2 In the light of the submissions made on behalf of the assessee, no further disallowance under Section 14A is called for in the light of the judgment rendered in the case of Joint Investments P. Ltd. Vs. CIT, (2015) 372 ITR 694 (Del) and Pr.CIT vs. Caraf Builders and Constructions P. Ltd. (2019) 414 ITR 122 (Del) (SLP dismissed by SC). It is well settled law that disallowance under Section 14A can be made only in respect of those investments which have yielded tax free income during the year as held in Caraf Builders (supra) and ACB India Ltd. vs. ACIT (2015) 374 ITR 108 (Del). The AO is thus directed to delete the disallowance under Section 14A made over and above the disallowance offered by the assessee. 11.3 Ground No.3 of the appeal of the assessee is allowed.”

“12. Ground No.4 concerns additions of Rs.2,03,96,540/- on account of disallowance of ESOP expenses. 12.1 As per the draft assessment order, the AO observed that the assessee has claimed Rs.2,03,96,540/- under Section 37(1) of the Act under the head ‘employees ESOP compensation expenses’. It was submitted by the assessee that during the year under consideration, the company granted 1,64,650 options comprising equal number of equity shares in one or more tranches to eligible employees of the company. The options are granted with specific exercise period from the date of vesting of shares and the options are exercisable at a pre-determined price of Rs.50 each resulting in issue of share on discount to the market price of the company shares on the date of grant. 12.2 As pointed out, it was asserted before the lower authorities that the expenses are incurred with a view to retain the talent / staff for the benefit of the company and consequently such expenses are allowable as business expenditure in the light of the judgments rendered in Biocon Ltd. vs. DCIT (2013) 35 taxmann.com 335 (SB); CIT vs. Lemon Tree Hotels Ltd. (supra) 12.3 Before the DRP, the assessee reiterated that the expenses are neither notional nor capital in nature. The expenses incurred are revenue in character and is incurred wholly and exclusively for the purpose of business. The AO has wrongly placed reliance on decision of Co-ordinate Bench of Delhi Tribunal in Ranbaxy Laboratories which has been overturned by the Special Bench thereafter in Bicon Ltd..

12.4 The issue is no longer res integra and covered in favour of the assessee by the Hon’ble Jurisdictional High Court in Lemon Tree (supra). The DRP however confirmed the proposal moved by the AO essentially on the ground that judgment rendered in the case of Lemon Tree Hotel Ltd. (supra) has been admitted in the Revenue Appeal by the Hon’ble Supreme Court as reported in (2019) 104 taxmann.com 27 (SC). The additions based on admission of SLP by Hon’ble Supreme Court is not tenable. While holding in favour of the Assessee, we also notice the assertions made on behalf of the assessee that similar claim has been allowed in the earlier years by the AO. No reason to take different stance in captioned assessment year has been brought to our notice. Thus, contrary view is not warranted. 12.5 We thus find force in the plea of the assessee for reversal of such disallowance. We direct the AO accordingly. 12.6 Ground no.4 is allowed.”

“14. Ground No.6 concerns adjustment of Rs.23,06,351/- on account of commission on standby letter of credit. 14.1 The Transfer Pricing Officer (TPO) observed that the assessee has claimed Rs.68,64,578/- incurred by it towards bank charges paid to bankers for standby letter of credit. While incurring such expenses, the assessee has not charged any amount to its Associate Enterprises (AEs) for risk borne by it. The TPO held that assessee was required to be compensated @2.5% by its AEs on account of exposure of SBLC issued by the banks. The AO determined the Arms’ Length Price of such charges at Rs.23,06,351/- and accordingly recommended adjustment of such amount under Section 92CA(3) of the Act. 14.2 Before the DRP, the assessee submitted that it has recovered full charges from the AEs and the AO / TPO was thus not justified in making further adjustment. In the alternative, the adjustment made by the AO/TPO is on a very high side. It was submitted that SBLC has been issued by the company bankers without any margin or any specific security. No cost has been borne by the assessee company. The actual bank commission charged by the bank has been duly recovered from the AEs. Therefore, there is no outgo. In any case, the guarantee charges charged by the bank are on market rate and the assessee has also recovered the same at the rate at which the bank has charged. The DRP however did not find any infirmity in the action of the AO/TPO. As per the rectification order passed under Rule 13 of DRP, 2009, the DRP has simply affirmed the action of the AO/TPO regarding the proposed adjustment of Rs.23,06,351/- without any discernible reason. 14.3 Before the Tribunal, the ld. counsel contended that the TPO/DRP/AO have committed error in making adjustment of Rs.23,06,351/- on account of commission on standby letter of credit. The ld. counsel submitted that no cost has been borne by the assessee-company as submitted repeatedly before the lower authorities. The actual bank commission charged by the bank at the market rate has been duly recovered from the AEs and therefore the AO/TPO/DRP was not justified in making further additions/adjustments. The ld. counsel reiterated that SBLC has been issued by the company’s bankers without any margin or any specific security. In the alternative and without prejudice, the ld. counsel referred the judgment of the Co-ordinate Bench in Havells India vs. ACIT (2023) 101 ITR (Trib) 81 (ITAT Delhi) and submitted that the adjustment in respect of corporate guarantee provided to AEs be determined @0.5% instead of 2.15% determined by the Revenue in the instant case. To support the adjustment at 0.5%, the assessee also referred to the decision delivered by the Hon’ble Bombay High Court in the case of Everest Kento Cylinders Ltd. 14.4 In the light of the undisputed fact emerging from record that no cost has been borne by the assessee company and in the absence of any rebuttal to the assertion that actual bank commission charges incurred has been fully recovered from the AEs, we hardly see any justification in the Transfer Pricing Adjustment on this score. We thus are not inclined to address the alternative plea of excessive estimation. 14.5 Ground No.6 is allowed.”

Order pronounced in the open Court on 16/02/2024