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Income Tax Appellate Tribunal, ‘A’ BENCH, CHENNAI
Before: SHRI N.R.S. GANESAN & SHRI A. MOHAN ALANKAMONY
आदेश / O R D E R
PER A. MOHAN ALANKAMONY, AM:
This appeal by the Revenue is directed against the order passed by the Ld. Commissioner of Income Tax (Appeals)-5, Chennai dated 08.12.2015 in for the assessment year 2011-12 passed u/s.250(6) r.w.s.143(3) of the Act.
2. The Revenue has raised several grounds in its appeal however the cruxes of the issue are that:-
i. The Ld.CIT(A) has erred in allowing deduction
U/s.80IB of the Act, even though the Ld.AO had made a finding that the net profit of the entire business on the sale of the identical product is only
0.88% while as the net profit of the 80IB unit is 41.2%. ii. The Ld.CIT(A) has erred in deleting the disallowance made by the Ld.AO U/s.40(a)(i) of the Act, by holding that the assessee is not liable to deduct tax at source on the overseas commission payments made to the non-resident U/s.195(2) of the Act outside India.
The brief facts of the case are that the assessee is a private limited company engaged in the business of manufacture of insecticides, having manufacturing units throughout India, filed its return of income for the assessment year 2011-12 on 30.09.2011, declaring total income of Rs.Nil. The case was selected for scrutiny and finally assessment order U/s.143(3) of the Act was made on 30.03.2014, wherein the Ld.AO assessed the income of the assessee at Rs.2,13,88,923/-.
Ground No.2(i) : Disallowance U/s.80IB of the Act 4.
The assessee had declared profit of Rs.22,82,28,774/- in its 80IB Jammu unit with respect to manufacture and sale of insecticides. The net profit of this 80IB unit works out to 41.2% as against the net profit of the entire business units of the assessee at 0.88% which is even less than 1%. On further scrutiny, the Ld.AO observed that the sale of the 80IB units to the other units were at an exorbitant price, which is much less than the price sold by the other units to the end customers. Therefore the Ld.AO opined that the assessee is consciously and deliberately inflating the profit of the Jammu unit which is 80IB unit. Hence, the Ld.AO invoked the provisions of 80IB(13) r.w.s. 80IA(8) of the Act and proceeded to arrive at the profit of the assessee at a reasonable basis. Accordingly the Ld.AO worked out the eligible profit of the 80IB unit as Nil, based on the following computation:-
“Net profit (NP) of 80-IB unit assessment order (NP of business/Gross Receipt (GR) of business)*GR of 80-IB unit = (10669228 / 1208305113)*530435869 =Rs.46,83,702/- Profit eligible for 80-IB deduction = Net profit + Depreciation as per Company Act – Depreciation as per IT Act =4683702+3456437-8916939=Rs.(7,76,800)
Since the profit eligible for 80-IB deduction is negative, the same is reduced to Rs.Nil/- Limit deduction under section 80-IB to Rs.Nil/-”
4.1. Before the Ld.CIT(A), the Ld.AR submitted as follows:- “5.1.1 There is no transfer by way of sale of finished goods held for the purpose of eligible business to the other units so as to warrant the application of Sec.80-IB(13) r.w.s 80-IA(8). In other words, there is no inter-unit sales as contemplated in Sec.80-IB(13) r.w.s. 80-IB(8). It is reiterated that Jammu unit is a self contained entity in respect of which sales and purchases are clearly identifiable, have been identified by the assessee and accounted as such in a separate set of books maintained for this unit. Therefore it is submitted that the proviso to Sec.80-IA(S) for computing profits and gains of the eligible unit on a reasonable basis does not arise as there are no exceptional difficulties in computing the said profits.”
After considering the submission of the Ld.AR, the Ld.CIT(A) held that the assessee is entitled for deduction U/s. 80IB of the Act, with respect to its 80IB unit by observing as under:- “5.1.2 I have gone through the submissions made by the appellant along with the copies of ledger accounts. The AO has made a conclusion that the profit in Jammu Unit is being inflated consciously and he has calculated profit eligible for deduction u/s 80-IB as negative ad disallowed the deduction u/s 80-lB. However, it is seen that goods are transported to depots for further sale to parties and sales are booked in accounts of that particular unit only. Since excise duty is applicable on manufactured goods, the appellant has to make relevant entries in books of accounts. The sale price being lesser than the inter unit transfer price is evident in a few cases only which is due to the discount offered as has been observed by the AO also. In view of these observation, the appellant is entitled to deduction u/s 80-IB. The AO is directed to allow deduction u/s 80-IB.”
4.2. Before us the Ld.DR vehemently argued in support of the order of the Ld.AO, while as the Ld.AR pleaded for sustaining the order of the Ld.CIT(A) by reiterating his findings.
4.3. We have heard the rival submissions and carefully perused the materials available on record. The Ld.AO has categorically made a finding in his order that the assessee is inflating the sale of the products from its 80IB unit to the other units and the other unit’s sale price to the end users are much less than the purchase price of the products purchased from the 80IB units.
While as the Ld.CIT(A) in his order states that the sale price to the end users is lesser than the inter unit transfer price only in few cases and that was due to the discount offered. Thereafter the Ld.CIT(A) abruptly allows the issue in favour of the assessee without making any other finding or explanation. Therefore, we do not find any merit in the order of the Ld.CIT(A). We also do not understand the ratio behind the computation made by the Ld.AO while arriving at the profit of the 80IB unit as “Nil” and assessing the gross total income of the assessee at Rs.1,05,36,987/-, when the Ld.AO has made a finding that the profit declared by the 80IB unit Rs.22,82,28,774/-. From these facts it appears that the assessee had declared loss of Rs.21,76,91,787/- (Rs.22,82,28,774 - Rs.1,05,36,987) in its other units. These facts are not elaborated in the order of the Ld.AO. Considering the complexity of the issue, we are of the considered view that the entire issue has to be looked into afresh by the Ld.AO. Therefore, we hereby remit the matter back to the file of Ld.AO for de-nova consideration.
Ground No.2(ii) : Disallowance U/s.40(a)(ia) of the Act:-
The assessee had made payments to non-residents outside India as detailed herein below: 1. Research & Development (Vietnam) – Rs.1,10,565/-
Commission (Brazil) - Rs.5,21,430/- 3. Advertisement and Sale promotion - Rs.2,10,150/- (Burkino Faso) -------------------- Total Rs.8,42,145/- ============
The Ld.AO had opined that the afore stated payments falls under the field “fees for technical services” as enshrined in the Explanation 2 to Section 9(1)(vii) of the Act, because it is in the nature of “fee for managerial, technical or consultancy services”.
He therefore further opined that all the above payments made to foreign agents will be deemed to accrue or arise in India as provided in Section 9(i)(vii)(b) of the Act. Since the assessee had not deducted tax at source for the afore stated payments, the Ld.AO invoked the provisions of Section 40(a)(ia) of the Act and disallowed the expenditure.
5.1 On appeal the Ld.CIT(A) held the issue in favour of the assessee by observing as under: “5.3.2 I have considered the findings given by the AO and also submissions made by the AR of the appellant. The AO has disallowed R&D(Vietnam) amounting to Rs.1,10,565/- due to non deduction of tax at source. As the foreign agent has no permanent establishment in India and by virtue of DTAA between India and Vietnam, the income does not arise in India. Therefore, the AO is directed to allow the same. The AO has disallowed commission (Brazil) payment of Rs.5,21,430/- as no tax was deducted. The commission paid to foreign agents for processing orders cannot be called either to rendering of technical services or managerial or consulting services. The Hon'ble Delhi High Court in the case of Director of Income Tax (International Taxation)-II u/s Panalfa Autoelektrik Ltd. 49 Taxmann.com 412 have held that services rendered for procurement of export orders etc. cannot be treated as managerial services provided by the non residents. Therefore, the AO is directed to allow commission, payment of Rs.5,21,430/-. The AO has disallowed advertisement and sales promotion of Rs.2,10,150/- paid to M/g INERA, Centre Regional De Recherches Environnmentales et agricoles de l'ouest in Burkina Faso. The appellant states that DTAA is not applicable. Delhi ITAT in the case of DCIT Circle 12(1), New Delhi vs. Hero Management Services Ltd. Vide dated 21.02.2014 has decided the issue in favour of the assessee regarding market development expenses. In view of the fact that no PE is in India and Delhi ITAT judgement, the AO is directed to allow advertisement and sales promotion expenses. This ground of appeal is allowed.”
5.2 The Ld.DR argued by reiterating the findings of the Ld.AO while as the Ld.AR relied on the order of the Ld.CIT(A).
5.3.1 We have heard the rival submissions and carefully perused the materials available on record. The Ld.CIT(A) has made a categorical finding that the foreign agents did not have any permanent establishment in India with respect to Research & Development fees received by them. Further placing reliance in the DTAA treaty between India and Vietnam, the Ld.CIT(A) arrived at the conclusion that in the case of the assessee income did not arise in India to the foreign agent and hence provisions of Section 195 of the Act is not applicable. We find merit in the order of the Ld.CIT(A) on this issue because the facts are not disputed and in such circumstance the assessee is not bound to deduct tax at source because the income cannot be deemed to be accrued or arise in India as per the provisions of the Act.
Therefore we do not find any reason to interfere with the Order of the Ld.CIT(A) on this issue.
5.3.2 With respect to commission paid to foreign agents, the Ld.CIT(A) placed reliance in the order of the Hon’ble Delhi High Court in the case DIT(International Taxation –II) vs. Panalfa Autoelektrik Limited reported in 49 taxmann.com 412, wherein it was held that the services for procuring export orders etc., cannot be treated as managerial services and accordingly allowed the appeal of the assessee. On this issue we are also reminded of the decision of the Hon’ble Jurisdictional High Court in the case CIT vs. Faizon Shoes Pvt. Ltd. reported in3 67 ITR 0155, wherein it was held that the provisions of Section 195 of the Act will not be applicable when commission is paid outside India for rendering services outside India. On this issue also, we find merit in the order of the Ld.CIT(A) because the assessee’s case is identical to the case M/s. Faizon Shoes supra and therefore does not call for any interference in his order.
5.3.3 The payment made towards advertisement and sales promotion is also similar to the issue with respect to payment of commission outside India for services rendered outside India 10 which is covered by the decision of the Hon’ble Jurisdictional High Court in the case Faizon Shoes supra. Therefore the decision rendered by the Ld.CIT(A) does not call for any interference.
In the result, the appeal of the Revenue is partly allowed for statistical purposes.
Order pronounced on 13th September,2017 at Chennai.