HARSHA IMPEX,CHENNAI vs. ITO, CHENNAI

This appeal filed by the assessee is directed against the order of the ld. Commissioner of Income Tax (Appeals) 5, Chennai dated 02.11.2016 relevant to the assessment year 2011-12. The assessee has raised two effective grounds in its appeal, viz., (i) the ld. CIT(A) has erred in confirming the disallowance of overseas export commission of ₹.30,68,879/- paid to non residents under section 40(a)(i) of the Income Tax Act, 1961 [“Act” in short] and (ii), the ld. CIT(A) has erred in confirming the disallowance of expenses of ₹.24,19,000/- incurred towards pollution treatment under section 40(a)(ia) of the Act.

It was the submission of the ld. Counsel that during the course of scrutiny assessment under section 143(3) of the Act, from the profit and loss account, the Assessing Officer noticed that the assessee has claimed export commission payment – overseas for ₹.30,68,879/-. Since the assessee has not entered into any agreement with foreign buyers, the Assessing Officer was of the opinion that the payment was made only for the purpose of sale of the assessee outside India by means of engaging agents and as per the provisions of section 9(1)(vii) of the Act, any payment made for the purpose of rendering managerial services outside India shall be considered only as the payment made for fees for technical services. The Assessing Officer concluded that the Explanation 4 to section 9(1)(i) and Explanation 2 to section 195(1), introduced by the Finance Act, 2012 with retrospective effect from 01.04.1962 clearly applies to the present case and held that the commission payment of ₹.30,68,879/- attracts provisions of TDS under section 195 of the Act. It was the submission of the ld. Counsel that by following the decision in the case of Thomas George Muthoot v. CIT in of 2014 dated 03.07.2015, the ld. CIT(A) confirmed the disallowance made under section 40(a)(ia) of the Act. It was the submission of the ld. Counsel that that the export commission paid to non-resident agents outside India does not attract TDS provisions. It was further submitted that the issue is squarely covered in favour of the assessee by the decision of Hon’ble Jurisdictional High Court in the case of CIT v. Faizan Shoes Pvt. Ltd. 367 ITR 155 (Mad).

On the other hand, the ld. DR strongly supported the orders passed by the authorities below.

We have heard both sides, perused the materials available on record and gone through the orders of authorities below. The assessee has demonstrated before the Assessing Officer that what was paid to the non- resident agents was nothing but commission simpliciter and such export commission paid to non-resident agents outside India does not attract TDS provisions. We find that in the case of CIT v. Faizan Shoes Pvt. Ltd. (supra), the Hon’ble Jurisdictional High Court gave a finding that where the assessee simply paid a commission simpliciter to non-resident agent outside India for procuring export orders from overseas buyers and the non-resident agent did not provide any technical services for purposes of running business of assessee in India, the assessee was not liable to deduct tax at source on such commission paid, wherein, various decisions have been referred including the decision of the Hon’ble Supreme Court in the case of GE India Technology Centre (P) Ltd. v. CIT 327 ITR 456 (SC). Respectfully following the decision in the case of CIT v. Faizan Shoes Pvt. Ltd. (supra), the disallowance made towards overseas export commission of ₹.30,68,879/- under section 40(a)(ia) of the Act is deleted. Thus, the ground raised by the assessee is allowed.

The next ground raised in the appeal of the assessee is with regard to the confirmation of disallowance of ₹.24,19,000/- made under section 40(a)(ia) of the Act incurred towards pollution treatment.

It was the submission of the assessee that the above payments were made by the assessee to the Pallavaram Tanners Industrial Effluent Treatment Co. Ltd., Chennai on behalf of the landlord for removal of effluents every month depending upon the quantum of effluents and the above company claims treatment charges depending upon the quantum of effluents and there was no regular monthly payments based on Annual Maintenance Contracts and there were no regular contracts in this regard between the above company and any landlord in that area. It was the submission that since there were no element of contract between the landlord of the factory and the assessee in respect of pollution treatment and TDS provisions would not apply for the above payments. Since TDS was not deducted on the above payment, the entire amount was disallowed and brought to tax. It was the submission of the assessee that on appeal, the ld. CIT(A) confirmed the disallowance. By filing certificate from accountant under first proviso to sub-section (1) of section 201 of the Act, the ld. Counsel has submitted that the recipient has offered to income tax and thus, the issue is squarely covered by the decision in the case of CIT v. Ansal Land Mark Township (P) Ltd. 377 ITR 635.

On the other hand, the ld. DR supported the orders of authorities below.

We have heard rival contentions. Since TDS was not deducted by the assessee on the pollution treatment charges paid to Pallavaram Tanners Industrial Effluent Treatment Co., the Assessing Officer disallowed the same and brought to tax. By filing certificate from accountant under first proviso to sub-section (1) of section 201 of the Act, the ld. Counsel for the assessee has vehemently argued that the recipients has accounted the payment for taxation and the assessee cannot be held as assessee in default and prayed for deleting the disallowance. Non deduction of tax at source from payments of expenditure, particularly when the recipient has taken into account the income embedded in these payments, paid due taxes thereon and filed income tax returns in accordance with the law, in our considered view, declining deduction in respect of expenditure relating to the payments of this nature cannot be treated as an “intended consequence” of section 40(a)(ia) of the Act. But, we find that such plea was not raised before the authorities below. However, since we find force in the plea raised by the assessee by way of Petition in terms of Rule 29 of the ITAT Rules, we set aside the issue to the file of the Assessing Officer to call for and verify the accounts of the payee and decide the issue afresh after allowing opportunity of being heard to the assessee. Thus, the ground raised by the assessee is allowed for statistical purposes.

In the result, the appeal filed by the assessee is partly allowed for statistical purposes. Order pronounced on the 02nd May, 2018 at Chennai.