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Income Tax Appellate Tribunal, ‘ B’ BENCH : CHENNAI
Before: SHRI ABRAHAM P.GEORGE & SHRI GEORGE MATHAN
आदेश / O R D E R
PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER:
In this appeal filed by the Revenue in which it assails an order dated 20.04.2017 of ld. Commissioner of Income Tax (Appeals)- 7, Chennai, it has altogether raised four grounds of which grounds 1 & 4 are general in nature needing no specific adjudication.
ITA No.1630/Mds/2017 :- 2 -:
2. Ground No.2 of the Revenue reads as under:-
‘’2.1. The CIT (A) erred in deleting the disallowance made on account of commission paid to non- resident agent without deducting TDS u/s 195 of the Act, without considering the nature of service i.e., managerial and technical services are provided by the foreign agent. 2.2. The CIT (A) failed to appreciate the fact that the foreign agent was fully involved in providing managerial and technical services to the assessee for procuring export orders. 2.3. The CIT (A) failed to appreciate the fact that the assessee failed to discharge its onus by not deducting TDS ills 195 of the Act’’.
Facts apropos are that assessee engaged in the business of 3. manufacturing and exports of garments, had filed its return of income for the impugned assessment year disclosing Nil income. During the course of assessment proceedings, it was noted by the ld. Assessing Officer that assessee had paid �58,69,024/- to two foreign agents named Mr. Chris Boreham and M/s. Edmond Dantes Limited as commission. As per the ld. Assessing Officer, assessee ought have deducted tax at source on the above amount as required u/s.195 of the Income Tax Act, 1961 (in short ‘’the Act’’). Assessee was put on notice. Reply of the assessee was that the payment was agency commission @2% on all commercial exports canvassed by these
ITA No.1630/Mds/2017 :- 3 -: entities. Assessee also filed a copy of a letter in this regard issued by M/s. Edmond Dantes Limited. However, ld. Assessing Officer did not accept the above reply. According to him, Mr. Chris Boreham was a leading handler of export for readymade garments. As per the ld. Assessing Officer, the agreement which was in the nature of a letter, was dressed upto cater and circumvent Sec.195 of the Act. Further, as per the ld. Assessing Officer, e-mail correspondence between assessee and these entities were on matters relating to cotton prices and about the topic of cotton prices which they were to discuss when partner of the assessee visited Berlin. According to the ld. Assessing Officer, e-mail between the assessee and the foreign agent established that the latter was not a mere agent but was also involved in advising the assessee on accounting the commission payments, based on Indian Accounting cycle. Further, as per the ld. Assessing Officer such agents were also involved in strategizing the price of the cotton. Ld. Assessing Officer was of the opinion that the services rendered by the agents were technical and managerial in nature.
According to him irrespective of the citum of business of the foreign agent, income earned by them from sources in India was taxable in their hands. As per the ld. Assessing Officer, assessee had failed to deduct tax at source as required u/s.195 of the Act. Disallowance of �58,69,024/- was made applying Sec.40(a)(i) of the Act.
ITA No.1630/Mds/2017 :- 4 -:
Aggrieved, assessee moved in appeal before ld. Commissioner of Income Tax (Appeals). Argument of the assessee was that the foreign agents were entitled to commission based on the invoice raised by the assessee for the exports canvassed through them. As per the assessee, such commission was paid only on realization of the exports proceeds. Further, as per the assessee, discussion regarding cotton prices was only due to the fact that commission was payable as a percentage of the selling price. Ld. Commissioner of Income Tax (Appeals) after considering the submissions of the assessee held that payments made to the foreign agents were in the nature of sales commission and was not for any managerial or technical services. According to him, such remuneration was linked to the volume of export orders procured by the foreign agent and was not given for any specific services like market survey, design assistance, quality or styling of products. As per the ld. Commissioner of Income Tax (Appeals) commission to Non Resident Agents could not be considered as technical services. Reliance was placed by ld. Commissioner of Income Tax (Appeals) on the judgment of Hon’ble Jurisdictional High Court in the case of CIT vs. Faizan Shoes Private Limited, 367 ITR 155 , and that of Hon’ble Apex Court in the case of CIT vs. Toshoku Limited, 125 ITR 525. What was held by ITA No.1630/Mds/2017 :- 5 -:
the ld. Commissioner of Income Tax (Appeals) is reproduced hereunder:-
‘’4.6 On analyzing the facts and circumstances of the appellant's case further, the following aspects are of relevance: The agent had rendered the services 1. outside India but their services were not utilized in India.
The commission income to non-resident agent was not received in India and was not accruing or arising iI1 India whether directly or indirectly.
Income in the form of commission did not accrue or arise to the non- resident agent through or from any asset or source of income in India or through transfer of capital asset situated in India.
4. Such commission payments did not fulfill the conditions specified under Section 9 (l)(i) of the Act. 4.7 The facts in the case of the appellant firm are similar to the facts of the decision in the case of Toshoku Limited decided by the Hon'ble Apex Court (supra). In the appellants' case also services of non-resident foreign agents have been taken to procure export orders. The commission paid is linked. to the procural of export order above, and not otherwise. The Hon'ble Supreme Court in the case of Toshoku Limited (supra) has settled the law by holding that the provisions of Section 9(1) of the Act are not applicable to payments made on account of commission to non-resident sales agent. Consequently, the provisions of Section 195 of the Act do not apply. Reliance is also placed on the decision of the Hon'ble Madras High Court in the case of Faizan Shoes Private Limited discussed supra. 4.8 In view of the facts and circumstances as discussed above, the disallowance of Rs.58,69,024/- made on account of commission paid to non- resident agent stands deleted.
ITA No.1630/Mds/2017 :- 6 -:
These grounds are allowed’’.
, 5. Now before us, ld. Departmental Representative strongly assailing the order of the ld. Commissioner of Income Tax (Appeals) submitted that Explanation to Sec 9(2) of the Act was substituted by Finance Act, 2010 with retrospective effect w.e.f. 01.06.1976.
According to him, by virtue of this explanation, the question whether Non Resident had rendered services in India or had a place of business or business connection in India had become irrelevant. According to him, once payment was in the nature of royalty or technical services, assessee was obliged to deduct tax at source. As per the ld. Departmental Representative by virtue of Explanation (2) to Clause (vii) of Section 9(1) of the Act, technical services included rendering of any managerial, technical or consultancy services. Thus, according to him, ld. Commissioner of Income Tax (Appeals) fell in error in holding that assessee was not liable to deduct tax at source on the payments effected by it to the Non Resident Agents.
Per contra, ld. Authorised Representative strongly supported 6.
the order of the ld. Commissioner of Income Tax (Appeals).
We have considered the rival contentions and perused the orders of the authorities below. It is not disputed by the Revenue that ITA No.1630/Mds/2017 :- 7 -:
commission paid by the assessee to the foreign agents was calculated as a percentage of the sales. There is much strength in the argument of the assessee that prices of commodity was discussed with the agents, since commission was worked out as a percentage of the billings. Further, assessee could also show that commission was paid by it only on the actual realization from the exports canvassed by the foreign agents. There is nothing on record to show that agents had rendered any managerial, technical or consultancy services. The agents were simply canvassing sales for the assessee and getting commission. Their lordships in the case of Faizan Shoes Private Limited (supra) had held as under:-
"On a reading of Section 9(1)(vii) of the Act, we are not inclined to expect the plea taken by the learned Senior Standing Counsel appearing for the Revenue that commission paid by the assesse to the non-resident agent would come in the term of "fees for technical services ". In the case on hand, for procuring orders for leather business from overseas buyers wholesalers or retailers as the case may be, the non-resident agent is paid 2.5% commission on FOB basis. That appears to be a commission on simpliciter. What is in the nature of technical service that the so-called non-resident agent has provided abroad to the assesse is not clear from the order of the Assessing Officer. The opening of letters of credit for the purpose of completing export obligation is an instant of export and, therefore, the non-resident agent is not an obligation to render such services to the assesse for which commission is paid. The non-resident agent does not provide technical services for the purposes of running of the business to the assessee in India. The services rendered by the non-resident agent, can at best be called as the service for completion of ITA No.1630/Mds/2017 :- 8 -: export commitment. We are, therefore, of the considered opinion that the commission paid to the non-resident agent will not fall within the definition of fees for technical services.
It is to be noted that judgment given by Jurisdictional High Court was after considering the effect of substitution of Explanation to Section 9(2) of the Act, by Finance Act, 2010 with retrospective effect from 1.09.1976. We are therefore of the opinion that the ld. Commissioner of Income Tax (Appeals) was justified in deleting the disallowance made u/s.40(a) (ia) of the Act. Ground No.2 of the Revenue stands dismissed.
Ground No.3 of the Revenue is as under:- 8.
‘’3.1. The CIT (A) erred in deleting the disallowance of forward contract as speculation loss without considering the facts that these transactions were carried out through the assessee's banker not through recognized stock exchange. 3.2 The CIT (A) failed to appreciate the facts that the statutory provision u/s 43(5) of the Act, makes it eligible/qualify/recognize the trading in the forward market as business, only when it routed through recognized stock exchange, the assessee should fulfill the above conditions to claim the same’’.
ITA No.1630/Mds/2017 :- 9 -:
Facts apropos are that assessee had made forward bookings to guard against foreign exchange fluctuation and had suffered loss of �25,08,718/- on cancellation of such bookings. Forward booking cancellations were done by the assessee through his bank. Ld. Assessing Officer was of the opinion that forward bookings were not traded through a recognized stock exchange, and hence the resultant loss was speculation loss. According to him, assessee could not prove that loss arising on account of foreign exchange hedging contracts arose through any trading done through recognized stock trading.
Loss of �25,08,715/- was treated separately as speculation loss by the ld. Assessing Officer.
Aggrieved, assessee moved in appeal before the ld. Commissioner of Income Tax (Appeals). Argument of the assessee was that the forward contracts entered by it were to lock the exchange rate, on sales realizations that were expected on a future date.
According to the assessee, settlement of such foreign contract could be either on cash or on delivery basis or on export realization. As
per the assessee, if at the time of export realization the rates were such that assessee would have suffered substantial loss if the agreed currency rates were accepted, it went for a cancellation of the forward contract, resulting in loss. As per the assessee, this was neither
ITA No.1630/Mds/2017 :- 10 -: speculation business nor speculation loss for application of Section 43(5) of the Act.
Ld. Commissioner of Income Tax (Appeals) was appreciative of the above contention. According to him, Co-ordinate Bench of the Tribunal in the case of SCM Garments Private Limited vs. DCIT, (2015) 69 SOT 397 had held that forex derivative transactions which had a close proximity with the business of the assessee could not be considered as speculative business. He directed the ld. Assessing Officer to allow the loss as business loss.
Now before us, ld. Departmental Representative strongly 12. assailing the order of the ld. Commissioner of Income Tax (Appeals) submitted that Section 72(1) of the Act clearly provided separate treatment for speculative loss. According to him, unless forward contracts were traded through a recognized stock exchange, resultant loss could only be deemed as speculative loss.
Per contra, ld. Authorised Representative strongly supporting the orders of the authorities below submitted that each of the forward contract booked by the assessee were against exports and was to be adjusted against collection of bills. Reliance was placed on the copies of contract booking notes placed at paper book pages 41, 43, 45,
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47, 49,51, 53, 55, 58 & 61. According to him, ld. Assessing Officer was under a wrong impression that assessee was doing speculation business.
We have considered the rival contentions and perused the orders of the authorities below. Section 43(5) of the Act is reproduced hereunder:-
(5) "speculative transaction" means a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips: Provided that for the purposes of this clause-- (a) a contract in respect of raw materials or merchandise entered into by a person in the course of his manufacturing or merchanting business to guard against loss through future price fluctuations in respect of his contracts for actual delivery of goods manufactured by him or merchandise sold by him ; or (b) a contract in respect of stocks and shares entered into by a dealer or investor therein to guard against loss in his holdings of stocks and shares through price fluctuations ; or (c) a contract entered into by a member of a forward market or a stock exchange in the course of any transaction in the nature of jobbing or arbitrage to guard against loss which may arise in the ordinary course of his business as such member ; or ITA No.1630/Mds/2017 :- 12 -:
(d) an eligible transaction in respect of trading in derivatives referred to in clause (ac) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956), carried out in a recognised stock exchange ; or (e) an eligible transaction in respect of trading in commodity derivatives carried out in a “recognised association, which is chargeable to commodities transaction tax under Chapter VII of the Finance Act, 2013 (17 of 2013)”, shall not be deemed to be a speculative transaction ; Sub clause (a) clearly say that contracts in respect of raw materials or merchandise entered into by a person to guard against loss through future price fluctuations cannot be deemed as speculation transactions. A perusal of the paper book at pages 41, 43, 45, 47, 49,51, 53, 55, 58 & 61 clearly show that assessee had booked forward contract against exports and the settlement was against collection of export bills. In other words, bankers had allowed assessee to enter into such contracts, only, since it was to guard against fluctuation that could arise on account of time gap between the date of billings and date of collection. Thus, according to us, loss arising out of cancellation of settlement of forward contract cannot be deemed as a loss arising out of any speculative transactions. We are of the opinion that the ld. Commissioner of Income Tax (Appeals) was justified in ITA No.1630/Mds/2017 :- 13 -: directing the ld. Assessing Officer to consider such loss as part of the assessee’s business loss. We do not find any reason to interfere with the order of the ld. Commissioner of Income Tax (Appeals). Ground No.3 of the Revenue stands dismissed.
In the result, the appeal of the Revenue stands dismissed. 15.
Order pronounced on Thursday, the 7th day of December, 2017, at Chennai.