M/S. SRIDHAR & CO.,CHENNAI vs. ITO, CHENNAI

Shri N. Devanathan, the Ld. counsel for the assessee submitted that the first issue arises for consideration is disallowance of ₹5,86,499/- towards the commission paid to foreign agent. According to the Ld. counsel, the assessee engaged in the business of export of finished leather goods and processed leather material. During the year under consideration, the assessee has paid a sum of ₹5,86,499/- to a foreign agent for procuring orders in Taiwan and Hongkong. Since, the services were rendered outside India, according to the Ld. counsel, the same is not taxable in the hands of the recipient agent in India. Therefore, no tax was deducted. Referring to the assessment order, the Ld. counsel submitted that the Assessing Officer disallowed the claim of the assessee only by placing reliance on the Explanation 2 to Section 195 of the Income Tax Act, 1961 (in short ‘the Act’). The service rendered by the foreign agent is not in dispute. However, the CIT (Appeals) found that the assessee has not produced any evidence for the services rendered by the foreign agent. According to the Ld. counsel, when the Assessing Officer has not disputed the services rendered by the foreign agent by procuring orders on behalf of the assessee, the CIT (Appeals) cannot say that no evidence was available on record to support that the foreign agent has rendered any service to the assessee. Referring to Section 195 (5) of the Act, the Ld. counsel submitted that the assessee was expected to make an application to the Assessing Officer provided the payment to non-resident is taxable in India. Referring to the judgment of the Madras High Court in CIT vs. Farida Leather Company, Tax case Appeal No.484 of 2015 dated 20.01.2016, the Ld. counsel submitted that the payment made by the assessee is not taxable in India. Therefore, there is no need for deducting any tax would arise for consideration at the time of payment. The Ld. counsel has also placed his reliance in another judgment of the Madras High Court in CIT v Kikani Exports Pvt. Ltd., [2014] 369 ITR 96 (Mad).

On the contrary, Shri B. Sahadevan, the Ld. Departmental Representative, submitted that for the purpose of making payment, the assessee has to prove that the foreign agent has rendered any service. In this case, no material is available on record to suggest that the foreign agent has rendered any service to the assessee. In the absence of any material to support the claim of services to be rendered by foreign agent, the CIT (Appeals) has rightly confirmed the disallowance made by the Assessing Officer.

We have considered the rival submissions on either side and perused the material available on record. The payment of ₹5,86,499/- to a foreign agent is not in dispute. The Assessing Officer disallowed the claim on the ground that since payment was made to a foreign agent, the assessee has to make an application before the Assessing Officer under Explanation 2 to Section 195 (5) of the Act. Since such application was not made, the Assessing Officer disallowed the claim of the assessee. On further appeal before CIT (Appeals), the CIT (Appeals) found that there was no supporting material to say that the foreign agent has rendered any services to the assessee. This Tribunal is of the considered opinion when the payment was made to a foreign agent for the services rendered exclusively outside India, the same is not taxable in India. In other words, the profit earned by the foreign agent on the services rendered outside India for procuring orders cannot be subject matter of taxation in India. The Madras High Court in CIT v Faizan Shoes Pvt. Ltd., [2014] 367 ITR 155 (Mad) found that the services rendered by non-resident agent can at the best be called as a services for completion of export commitment. The Madras High Court further found that the assessee was not liable to deduct tax at source when the non-resident agent provides services outside India on payment of commission. The Madras High Court in fact placed its reliance on the judgment of the Supreme Court in the GE India Technology Cen. (P) Ltd. v CIT, [2010] 327 ITR 456 (SC). However, the assessee has to substantiate that the non-resident agent rendered some kind of services to the assessee either by way of procuring orders or otherwise. In this case, the CIT (Appeals) found, no evidence was available on record for the services rendered by the non-resident agent. When the assessee exported finished leather goods and processed leather goods, there may be either an agreement or correspondence between the parties to support the fact of rendering services by the non-resident agent and the payment of commission. If there was no correspondence between the parties or agreement, there may be reference either in the purchase order placed by the purchaser of the foreign country or there may be some reference in the invoice raised by the assessee for export of goods.

This Tribunal is of the considered opinion, these matter has to be examined by the Assessing Officer to find out the reason for payment of ₹5,86,499/-. Since both the authorities below have not examined these documents, this Tribunal is of the considered opinion that the matter needs to be reconsidered. Accordingly, the orders of the lower authorities are set aside and the issue raised by the assessee is remitted back to the file of the Assessing Officer. The Assessing Officer shall re-examine afresh in the light of the material that may be submitted by the assessee and thereafter decide the same in accordance with law after giving a reasonable opportunity to the assessee.

The assessee has raised one more ground with regard to disallowance of bad debts of ₹2,72,226/-

The Ld. counsel for the assessee submitted that the assessee claimed an amount of ₹2,72,226/- towards bad debt. However, it is not a bad debt at all. It should be treated as trading loss in the course of the business. According to the Ld. counsel, there was electricity deposit of ₹1,53,618/- and unrealized rent to the extent of ₹1,18,608/-. Since the Electricity Department said that the deposit cannot be refunded by the Board and the assessee could not realize the rent to the extent of ₹1,18,608/- the same was claimed as bad debt instead of trading loss. Therefore, according to the Ld. counsel the claim made by the assessee has to be allowed as trading loss.

On the contrary, the Ld. D.R., submitted that it is not known in whose name the electricity deposit stands. If the assessee claims the EB deposit as revenue expenditure at the time of making the deposit, the same cannot be allowed as bad debt. Furthermore the unrealized rent cannot be construed as bad debt at all. It is also not a trading loss. Hence, it is not correct to say that the CIT (Appeals) has wrongly disallowed the claim of the assessee.

We have considered the rival submissions on either side and perused the material available on record. The assessee claims that the Electricity Board has not refunded the sum of ₹1,53,618/- towards EB deposit for providing service connection. The assessee has also claimed another sum of ₹1,18,608/- under the head bad debt written off. In fact, no such bad debt was written off in Books of Accounts. The assessee now claims that ₹2,72,226/- is only a trading loss. Therefore, the same has to be examined by the Assessing Officer. In other words, the claim of the assessee that the so called bad debt written off to the extent of ₹2,72,226/- has to be examined by the Assessing Officer afresh. Accordingly the orders of the lower authorities are set aside and the disallowance of bad debts of ₹2,72,226/- is remitted back to the file of the Assessing Officer. The Assessing Officer shall re-examine the matter afresh in the light of the material that may be filed by the assessee and thereafter decide the same in accordance with law after giving a reasonable opportunity to the assessee.

In the result the appeal of the assessee is partly allowed.