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Income Tax Appellate Tribunal, “C” BENCH, MUMBAI
This appeal by the assessee is arising out of the order of Commissioner of Income Tax-28, Mumbai [in short CIT(A)], in appeal No. CIT(A)-28/IT-42/ACIT-12(1)/2014-15 dated 30.03.2016. The Assessment was framed by the Asst. Commissioner of Income Tax, Circle-12(1), Mumbai (in short ‘ACIT’) for the A.Y. 2007-08 vide order dated 26-03-2014 under section 143(3) r.w.s 254 of the Income Tax Act, 1961(hereinafter ‘the Act’).
2. The first two interconnected issues are as regards to the order of CIT(A) confirming the action of the AO in disallowing expenses relatable to commission payment made to non-resident agents & outward freight charges paid to foreign shipping company through agents for non- deduction of TDS by invoking the provisions of section 40(a)(i) of the Act. For this assessee has raised the following ground No. 1 and 2: -
"1. On the facts and in the circumstances of the case and in Law the Hon'ble CIT(A) erred in upholding the addition made by the Ld AO by invoking provision of section 40(a)(ia) on commission payment made to Non Resident agent of Rs. 6,96,077/- and the reason assigned for doing so are wrong and contrary to the provision of Income Tax Act and rules made there under.
On the facts and in the circumstances of the case and in law the Hon'ble erred in confirming the addition made by the Ld AO by invoking provisions of section 40(a)(ia) on outward freight charges paid to foreign I shipping company or their agent of Rs. 69,00,468/-and the reason assigned for doing so are wrong and contrary to the provision of Income Tax Act and rules made there under.”
Briefly stated facts are that the assessee has paid commission of Rs. 3,14,948/- to one Imerys Table Wear Asia Ltd., based in Auckland, New Zealand and another payment of Rs.3,81,129/- to one JJ Degussa Pte Ltd. based in Singapore. As the assessee has not deducted TDS, the AO disallowed the above commission paid to these two parties aggregating to Rs.6,96,077/- by invoking the provisions of section 40(a)(i) of the Act. Similarly, the AO also noted that the assessee has made payment to various parties on account of outward freight charges amounting to Rs. 69,00,486/- but deducted the meager amount of Rs. 3,877/- in the return of income. According to AO, the assessee has not complied the provisions of section 40(a)(i) of the Act. The assessee contested that these payments were made to foreign shipping office or their agents and hence, there is no deduction of TDS on these payments.
The assessee relied on Board Circular No. 723 dated 19.09,1995 and claimed that the income of non-resident shipping companies to whom freight charges are paid are not liable to tax in India. Hence, according to assessee, on this freight charges of Rs. 69,00,486/-, there is no requirement for assessee to deduct TDS. Once there is no requirement to deduct TDS, no disallowance can be made by invoking the provisions of section 40(a)(i) of the Act. Aggrieved, assessee preferred the appeal before CIT(A) on both the issues i.e. disallowance of commission paid to foreign parties as well as outward freight charges paid to foreign shipping companies without deduction of TDS. The CIT(A) also confirmed the action of the AO. Aggrieved assessee is in second appeal before Tribunal
We have heard the rival contentions and gone through the facts and circumstances of the case. We find that the facts are admitted and there is no dispute about it. Admittedly, these payments are on account of commission made to foreign parties and similarly, the outward freight payments also made to foreign shipping companies. Admittedly there is no TDS deducted by the assessee on these payments. We find that exactly on identical facts and circumstances the coordinate bench of ITAT in the case of DCIT vs. Ardeshi B. Cursetjee & Sons Ltd. (2008) 24 SOT 48 (Mum) held that where the assessee has paid commission to its foreign agents outside India for services rendered outside India and claimed deduction of the same as business expenditure, the case of foreign agent is not covered by the provisions of section 9 of the Act and income of the foreign agent will not be taxed in India. The responsibility of deducting tax at source from the remittances of the commission to the foreign agent would arise only when such commission is taxable in India in the hands of the recipient. The income of the recipient in the form of commission received from assessee was not chargeable to tax in India. Therefore in our view, in the present case also the lower authorities have wrongly interpreted the provisions of section 40(a)(i) of the Act and also section 195 of the Act. The assessee has submitted copy of letter of non- residence regarding their tax residence and non-permanent establishment in India that there company is incorporated in New Zealand and Singapore. Similarly, in respect of outward freight charges paid to the agent of non-resident shipping company, Hon’ble Delhi High Court in the case of CIT (TDS) vs. Continental Carriers (P) Ltd. (2007) has considered the issue vide para 4 to 6 as under:-
4. The department’s appeal to the ITAT was dismissed. It was noticed that the assessee had submitted a list of shipping lines along with the names of the agents and corresponding bills of lading to the Assessing Officer at the time of the survey itself. It was further held: "In case the goods have been transported by a foreign shipping line, payments have obviously to be made to the foreign shipping lines or agents thereof. Even if payments have been made to sub-agents in some cases, these are passed on to the agents, who file return under section 172 in respect of such payments on behalf of the shipping lines. The finding of CIT (Appeals) is that confirma-tions have been filed from all the agents for filing of returns under section 172. Thus, finding has not been controverted by the learned DR by producing any other material.
Before us, Ms. Prem Lata Bansal, the learned counsel for the appellant, points out that the Assessing Officer had not discarded the case of the assessee entirely. Wherever the assessee had submitted proof that the payee company was an agent of the non-resident shipping company, such payment was not considered for the purpose of TDS. In particular, she placed reliance on paras 16.2, 16.3 and 16.4 of the assessment order which read as under :
"16.2 Thus, payments of Ocean Freight made to non-resident or agents thereof for shipping business of non-residents are covered under section 172, read with Circular No. 723, going by the law, wherever the assessee has submitted the confirmation from the payee companies to the effect that these (payees) are the non-resident shipping companies or the agents thereof, all such payments are excluded and not taken into consideration for the purpose of working out the default of the assessee-company in not deducting tax at source under section 194C.
16.3 However, in certain cases, the assessee has not been able to furnish any evidence to establish the payments of Ocean Freight are made to non-resident shipping companies or the agents therefore, on such payments the assessee was liable to deduct tax at source as all such payees have received the Ocean Freight charges in their own rights and not as the agent of non-resident shipping companies.
16.4 The assessee-company vide its reply dated 21-11-2003, had filed partywise details of Ocean Freight along with certain letters from the shipping companies/agents thereof stating that the said companies are Non- Resident Shipping Company or the agents thereof.
We are of the view that the question whether the payees, in the instant case, were agents of the non- resident shipping companies is a question of fact, which has been decided against the revenue concurrently by both the CIT (Appeals) as well as the ITAT. As already noticed, both the CIT (Appeals) as well as the ITAT have based their conclusions upon an appreciation of the evidence and held that in the facts and circumstances of the present case, the provisions of section 194C of the Act are not attracted.”
5. In view of the above, we are of the view that the lower authorities have erred in deciding the issue against the assessee. We delete the disallowances and allow this issue of assessee’s appeal.
6. The next issue in this appeal of assessee is against the order of CIT(A) confirming the action of the AO in making addition on account of national interest chargeable on debit balance of one of the partners of the firm amounting to Rs. 1,15,370/-. For this assessee has raised the following ground No.3 : -
"3. On the facts and in the circumstances of the case and in law the Hon’ble CIT(A) erred in upholding the addition made by Ld. AO of Rs. 1,15,370/- on account of notional interest chargeable on debit balance of one of the partners by disregarding the term & condition of the partnership deed and the reason assigned for doing so are wrong and contrary to the provision of income Tax Act and rules made there under.”
We have heard the rival contentions and gone through the facts and circumstances of the case. We find from the facts of the case that AO find from the accounts of the assessee that the assessee firm’s funds were utilized by one of the partners Shri Madhu Sudhan Daga by way of debiting the balance in his capital account as against the same the assessee firm is paying interest at the rate of 12% on the capital of the other partners. Therefore, the AO disallowed the sum of Rs. 1,50,370/- claimed out of the capital expenditure, by treating the same as interest chargeable on the debit balance of Shri Madhu Sudhan Daga. Aggrieved, assessee preferred the appeal before CIT(A) who confirmed the action of the AO by observing in Para 5.6 as under: -
"5.6 Ground 6: This is against the action of the AO in disallowing Rs. 1,15,370/- being interest on the debit balance of one of the partners capital account (Mr Madhusudhan Daga). The AO noted that the appellant was paying 12% interest to the other partners of the firm and no interest to this particular partner. However the fact that his capital account is in debit balance itself means that the interest bearing funds have been utilized by the partner himself. The AO therefore disallowed Rs. 1,15,370 being the interest on the debit balance of the partner. Before me the appellant stated that the AO has ignored the supplementary partnership deed which states that no interest is to paid to this one partner Mr. Madhusudhan Daga on his capital account. The appellant therefore states that no interest disallowance is called for. However this argument is besides the point. The case of the AO is that the debit balance in this partners capital account is out of the interest bearing funds of the appellant. This point has not been addressed by the appellant at all. Whether interest is payable to the partner or not is not the issue at hand. The issue is that the interest bearing funds have been utilized by the partner at the cost of the firm. The appellant has not been able to lead any evidence to show that the interest attributable to the borrowed funds is exclusively related to the business in light of the fact that some of the funds have landed up in the partners capital account which is a debit balance. In absence of any evidence to the contrary the finding of fact of the AO remains uncontroverted. I am therefore inclined to uphold the action of the AO in disallowing Rs. 1,15,370/. Ground 6 is dismissed.”
Now before us assessee’s counsel could not satisfied its claim by filing any evidence and could not point out any infirmity in the order of CIT(A). Hence, the same is confirmed and this issue of the appeal of assessee is dismissed.
In the Result, the appeal of the Assessee is partly allowed.
Order pronounced in the open court on 04-04-2018.