ASST CIT 14(2), MUMBAI vs. VENUS INTERNATIONAL, MUMBAI

PER SANDEEP GOSAIN,JUDICIAL MEMBER:

"1. On the facts and in the circumstances of the case and in law the Ld. CIT(A) has erred in deleting the addition u/s 40(a)(ia) of Rs.1 ,46,19,7721- as the assessee has neither deducted the TDS on payment of commission nor made any application to the AO to that effect for non-deduction of TDS.

2. On the facts and in the circumstances of the case and in law the Ld. CIT(A) has erred in relying on the decision of the Hon'ble Supreme Court in the case of GE India Technology Centre Pvt. Ltd. vs CIT 327 ITR 456 (SC) as the facts of this case are different from the present case and is not relevant to the instant case since in the case of GE India Technology, the issue was taxing the payment which constituted royalty and in the present case, the issue is taxing the commission.

(A.Y.2005-06) ACIT vs. M/s. Venus International

3. On the facts and in the circumstances of the case and in law the Ld. CIT(A) has erred in deleting the addition u/s 41 (1) of Rs.2,06,93,996/- without appreciating the fact that the onus of proving the genuineness of the same was with the assessee during the course of the assessment proceedings, which the assessee failed to do so.

Subsequently the return was revised on 12.01.2006 declaring total income of Rs.43,37,321/-. The return was revised to disallow the expenses of Rs.1,47,353/- u/s 40(a)(ia). The above return of income was processed u/s143(1) on 10.08.2006 and 08.03.2006 respectively. After recording the satisfaction note and obtaining the necessary approval notice u/s 148 was issued and served upon the assessee and after considering the submissions of the assessee, the order of assessment dated 06.03.2013 was passed by DCIT u/s 143(3) r.w.s.147 of the I.T.

Act,1961 thereby making disallowance u/s 40(a)(ia) and making additions u/s 40(a)(ia) of the I.T. Act.

Aggrieved by the order of the AO, the assessee carried the matter in appeal before the learned CIT (A) and the learned CIT (A) after hearing both the parties and perusal of the record, had partly allowed the appeal

(A.Y.2005-06) ACIT vs. M/s. Venus International of the assessee. Being aggrieved by this order of the CIT(A), the Revenue is now in appeal before us on the aforementioned grounds.

Ground Nos.1&2 Since the ground nos.1 &2 raised by the revenue relating to deduction of TDS on payment of commission are inter-connected and inter-related therefore we thought it fit to dispose off the same through the present common order.

“5.3 I have perused the assessment order, submissions of appellant, and the facts and circumstance of the case. I find that the AO has principally relied upon the decision of Hon'ble High Court of Karnataka in the case of Samsung Electronics Co. Ltd. 345 ITR 494 pronounced on 24.09.2009, wherein it was held following the decision of Hon'ble Supreme Court in the case of Transmission Corporation of A.P. Ltd. 239 ITR 587 that the question of the nature involving exercise of determining the liability of the non-resident assessee can be answered only by going through the procedure envisaged u/s 195(2) on making an application to AO in this regard. The appellant has however contended the said decisions were not directly on the subject case of the appellant, as these were on the Royalty issue and not on foreign commission as in present case of appellant. Further, the appellant has contended that the said decisions have been over-ruled by the decision of Hon'ble Supreme Court in the case of GE India Technology Centre Pvt. Ltd. vs. CIT 327 ITR 456 (SC) pronounced on 09.09.2010, wherein it was held that tax is required to be deducted at source only when the sum payable to non-resident is chargeable to tax. I have perused the said order in case of GE India Technology Centre Pvt. Ltd. (supra) and find that (A.Y.2005-06) ACIT vs. M/s. Venus International the Hon'ble Supreme Court has distinguished the case of Transmission Corporation (supra) observing that in the said case, a non-resident had entered into a composite contract wherein it was clear even to the payer that payments required to be made by him to the non-resident included an element of income which was exigible to tax in India, and the only issue raised in that case was whether TOS was applicable only to pure income payments and not to composite payments which had an element of income embedded or incorporated in them. Therefore, it was held in said case that the tax was to be deducted on gross amount if such payment included in it an amount which was exigible to tax in India. It was held that if the payer wanted to deduct tax at source not on gross amount out on the lesser amount, then it was necessary for him to make an application u/s 195(2) before the AO. In this context, the Hon'ble Supreme Court distinguished the case of Transmission Corporation (supra), and observed that the observation in that case had been completely, with respect, misunderstood by the Karnataka High Court to mean that it is not open for the payer to contend that if the amount paid by him to the non-resident is not at all "chargeable to tax in India", then no tax at source is required to be deducted from such payment. The Hon 'ble Supreme Court observed that this interpretation of the High Court completely lost sight of the plain words of Sec. 195(1) which in clear terms laid down that tax at source is deductible only from "sums chargeable" under the provisions of LT. Act, i.e. chargeable u/s 4, 5 and 9 of the Act. Therefore, the case of Samsung Electronics Co. Ltd. (supra) was set aside by Hon'ble Supreme Court. In aforesaid case of GE India Technology Centre Pvt. Ltd. (supra, the Hon'ble Supreme Court held that the most important expression "in Sec. 195(1) consists of word "chargeable under the provisions of the Act", and the payer is bound to deduct tax at source only if the sum paid is assessable in India. The Hon'ble Supreme Court further held that Sec. 195(2) pre-supposes that the person responsible for making the payment to the non-resident is in no doubt that tax is payable in respect of some part of the amount to be remitted but is not sure as to what should be the portion so taxable or the amount of tax to be deducted. In such a situation he is required to make an application to ITO (TOS) for determining the amount. It is only when these conditions are satisfied that the question of making an order u/s 195(2) arises. The Hon'ble Supreme Court also held that where a person responsible for deduction is fairly certain, then he can make his own determination as to whether the tax was deductible at source and if so, what should be the amount thereof.

I find that the appellant, by relying upon the CBDT Circular No. 786 dated 07.12.2000, and also based on its assessment of earlier years on similar facts, seems to be fairly certain that no tax was to be deducted on commission payable to the non-resident party i.e. PD Sinnar. The said circular stated that deduction of tax under (A.Y.2005-06) ACIT vs. M/s. Venus International section 195 would arise if the payment of commission to the non- resident agent is chargeable to tax In India, In the said circular, attention was also drawn to earlier Circular No.23 dated 23.07.l969 wherein the taxability of Foreign Agents of Indian Exporters' was considered, and It was clarified then that where the non-resident agent operates outside the country, no part of his income arises in India; and further since the payment is usually remitted directly abroad, it cannot be held to have been received by or on behalf of agent in India. Such payments were therefore held to be not taxable in India. The appellant, as stated in written submissions, seems to believe that the said party operated their business activity outside India; commission was to be paid in relation to the services provided outside India, commission was to be remitted to them directly outside India, and the said party did not have any permanent establishment in India. On such a belief, the appellant did not make any application u/s 195(2) to the AO, which cannot be sufficient ground to assume that the appellant was responsible to deduct tax at source u/s 195( 1) of the Act. In fact, the AO has not gone into the question of deductibility of tax at source on such payments on merits, so as to invoke the provisions of Sec. 195( 1); rather the said provisions have been invoked merely for the appellant not making application U/S 195(2). In these circumstances, the action of AO cannot be sustained relying upon the decision of Hon'ble Supreme Court in the case of CE India Technology Centre Pvt. Ltd. (supra), since nothing has been brought on record to show that the appellant's belief that tax was not required to be deducted on payment to said non-resident was unfounded. In view of the above, the addition made of Rs.1,46,19,722/- u/s 40(a)(ia) is not sustainable, hence deleted. Therefore, the gorunds of appeal are allowed.”

After analyzing the afore mentioned order of CIT and hearing the parties.

We are of the opinion that the revenue has raised the afore mentioned ground only on the basis that the assessee has neither deducted the TDS on payment of commission nor made any application to the AO to that effect for nonpayment of TDS. Although ld. DR appearing on behalf of revenue relied upon the judgment in the case of ‘Samsung Electronics Co. Ltd.’ 345 ITR 494 and relied upon the orders of AO. However after perusal of all the judicial pronouncements rendered by both the parties as (A.Y.2005-06) ACIT vs. M/s. Venus International well as orders passed by revenue authorities, we found that the Hon’ble Supreme Court has already over-ruled and set aside the decision rendered by Hon’ble High Court of Karnataka in the case of ‘Samsung Electronics Co. Ltd.’ (supra) while passing judgment in the case of ‘GE India Technology Centre Pvt. Ltd.’ vs. CIT 327 ITR 456 (SC) pronounced on 09.09.2010, Hon’ble Supreme Court has held that the most important expression in Section 195(1) consists of word “chargeable” under the provisions of the Act”, and the payer is bound to deduct tax at source only if the sum paid is assessable in India. The Hon’ble Supreme Court held that Section 195(2) pre-supposes that the person responsible for making the payment to the non-resident is in no doubt that tax is payable in respect of some part of the amount to be remitted but is not sure as to what should be the portion so taxable or the amount of tax to be deducted. In such a situation he is required to make an application to ITO (TDS) for determining the amount. But in the present case the applicability of section 195(2) would only arise in case the assessee is doubtful or is not sure as to what should be the portion so taxable or the amount of tax to be deducted and in case where a person responsible for deduction is fairly certain then in that eventuality he can make his own determination as to whether the tax was deductible at source and if so, what should be the amount thereof.

Considering the facts of the present case the applicability of section 195(2)of the I.T. Act is not made out. Therefore, there was no requirement for the assessee to make application to the AO for non deduction of TDS.

(A.Y.2005-06) ACIT vs. M/s. Venus International Since all those facts have already been considered by CIT(A) while passing impugned order.

No new circumstances have been brought on record before us in order to controvert or rebut the findings recorded by the learned CIT (A).

Moreover, there is no reason for us to deviate from the findings recorded by the learned CIT (A). Therefore, we are of the considered view that the findings recoded by the learned CIT (A) are judicious and are well reasoned. Accordingly, we uphold the same. Resultantly, this ground raised by the Revenue stands dismissed.

Ground No.3 The said ground relates to deleting the addition u/s 41(1) of Rs.2,06,93,996/- on the ground that the onus of proving the genuineness of the same was with the assessee during the course of the assessment proceedings, which the assessee fail to do so. CIT(A) has decided the said issue in para no.6.1 of its order which is reproduced herein below for the sake of reference:

“The AO observed that the assessee showed foreign commission payable at Rs.2,06,93,996/- of earlier years. On being asked to explain as to why the said outstanding commission should not be added to its total income considering it as ceased liability, the assessee did not reply to the same. The assessee had not produced any evidence in support of foreign commission outstanding and it was also not clear whether services were rendered by foreign parties or according to AO, the commission was outstanding for last so many years. It showed that commission was to be paid; therefore, the entire foreign commission payable was treated non genuine. As the assessee had failed to discharge its onus and could not prove the genuineness of the same,

(A.Y.2005-06) ACIT vs. M/s. Venus International therefore, the outstanding liability of Rs.2,06,93,996/- was treated as not genuine and added to assessee’s total income.”

Ld. CIT(A) has also considered the written submissions filed by assessee on 30.04.14 and which are reproduced in para no.6.2 of the CIT(A) and from the table mentioned in the said para which reveals that there was running account which was being maintained by outstanding creditors as on 31.03.2005 which included foreign commission payable and in addition it has been submitted that the assessee has already been showing this liability in its balance sheet . ld. AR further submitted that the assessee has not written off the foreign commission payable from its books of account nor did the other party namely PD SINAR write it off and there was constant communication between the assessee and PD SINAR on the payment issues.

Ld. CIT(A) after considering written submissions filed by assessee had decided the said issue in para no. 6.3 of its order and the same is reproduced here in below for the sake of reference:

“6.3 I have perused the facts and appellant's submissions very carefully. The appellant has contended that the said addition as ceased liability u/s 41 (1) is made without appreciating and correctly interpreting the evidence filed and without giving sufficient time. I find from the details of outstanding liability of foreign commission payable submitted by the appellant that the amounts pertaining to prior to 01.04.2004 (i.e. the beginning of relevant. financial year 2004-05) was in respect of Foreign Exp. Comm. - Sri Lanka (Rs.l2,09,802/-), South Africa (Rs.20,12,161/-), and Morocco (Rs.28,81,363/-), aggregating to Rs.61,03,3261- only. This shows that a substantial portion of the outstanding amount of Rs.2,06,93,9961- was out of the provision made for F. Y. 2004-05 under consideration, and therefore, the AO's contention that the whole commission was outstanding for last so many years does not seem to be correct.

(A.Y.2005-06) ACIT vs. M/s. Venus International

The appellant has also submitted the reasons of withholding the payments to the said party PO SINAR, who was a commission agent assisting the appellant in procuring export orders. follow-up for export realization of payments, and the said commission was to be paid only. after the payment from respective buyers was made and any issues were settled, I find the contention of appellant is not out of context as it is not uncommon to withhold payments to commission agents pending settlement of dues from corresponding buyers. It also seems to be an undisputed fact that the said commission payable by appellant is not waived or unilaterally written off by the receiver of commission, and also the payment of said amount was not time barred in relevant assessment year. Therefore, it cannot be considered as. ceased liability u/s 41(1) of the Act. The appellant's reliance-on various case laws referred in the written submissions also does not seem to be out of context. I further find that the AO has not brought sufficient facts on record to treat the said liability as non-genuine. The assessment order speaks of the appellant having been asked to explain as to why the outstanding commission of Rs.2,06,93,996/- should not be added to its total income considering it as ceased liability. The non- submission of reply to the same cannot be enough to construe that no services might have been rendered by said party, and hence the treatment of said liability as non-genuine is not fully substantiated in the assessment order and hence the additions on this ground cannot be sustained.

The appellant has submitted the amounts of foreign commission payable assessment year- wise, showing outstanding commission of large amounts payable till A. Y. 2010-11, even though no export sales were made since A. Y. 2009-10 onwards. Still I find that the said facts are not relevant in making additions in A. Y. 2005-06 under consideration, when the export business of the appellant was very much alive, and large amounts of commission was being paid to the said party year after year.

The appellant's without prejudice ground of appeal that the AO erred in duplicating/ overlapping the addition made twice, i.e. once u/s 40(a)(ia) and again u/s,41(1) is also not devoid of merit, though the addition made u/s 40( a)(ia) is already deleted hereinabove.

In view of aforesaid discussions, I delete the addition made u/s 41 (1) of Rs.2,06,93,996/- and therefore, the grounds of appeal are allowed.”

After perusal of the afore mentioned order we are of the considered view that ld. CIT(A) has taken into consideration that a substantial portion of (A.Y.2005-06) ACIT vs. M/s. Venus International the outstanding amount was out of provision made for A.Y. 2004-05 under consideration, and therefore the ld. CIT(A) has rightly held that the AO’s contention that the whole commission was outstanding for last so many years was not correct. Ld. CIT(A) has also considered that the said commission payable by assessee was not been waived or unilaterally written off by the receiver of commission and also the payment of said amount was not time barred in relevant assessment year.

Considering all the facts and legal propositions, the CIT(A) has rightly come to the conclusion that the non submission of reply to the same cannot be enough to construe that no services might have been rendered by the assessee and hence the treatment of said liability as non- genuine was not fully substantiated in the assessment order and hence the additions of this ground was rightly deleted by CIT(A). No new circumstance has been brought on record before us by the learned DR in order to controvert or rebut the findings recorded by the learned CIT (A) on the basis of the remand report. Moreover, there is no reason for us to deviate from the findings recorded by the learned CIT (A). Therefore, we are of the considered view that the findings recoded by the learned CIT (A) are judicious and are well reasoned. Accordingly, we uphold the same. Resultantly, this ground raised by the Revenue stands dismissed.

Ground No.4 &5 of the Revenue’s appeal are general in nature and hence, requires no specific adjudication.

(A.Y.2005-06) ACIT vs. M/s. Venus International