I.T.O WD - 12(3),KOLKATA., KOLKATA vs. M/S JAI VIKSHU NIKETAN PVT LTD, KOLKATA

आदेश /O R D E R

PER Waseem Ahmed, Accountant Member:-

This appeal by the Revenue is against the order of Commissioner of Income Tax (Appeals)-XII, Kolkata dated 21.01.2013. Assessment was framed by ITO Ward- 12(3), Kolkata u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) vide his order dated 27.12.2011 for assessment year 2009-10. The grounds raised by the Revenue per its appeal are as under:- “1. That on the facts and in the circumstances of the case, the Ld. CIT(A) has erred in directing the A.O to delete disallowance of expenses under the head “commission” of Rs.4,29,46,229/- while the assessee failed to substantiate that these are genuine expenses.

ITA No.1133/Kol/2013 A.Y.2009-10 ITO Wd-12(3) Kol. vs. M/s Jai Vikshu Niketan Pvt. Ltd. Page 2 2. That on the facts and in the circumstances of the case, the Ld. CIT(A) has erred in observing that TDS was not required to be deducted on payments of Rs.4,29,46,229/-, which have been claimed by the assessee as expenses towards commission paid to foreign parties.”

Shri Debasish Lahiri, Ld. Addl. CIT DR represented on behalf of Revenue and Shri Subash Agarwal, Ld. Advocate appeared on behalf of assessee.

1 Aaypee International 15/F,Rm E, Nathan Road, 32,48,223 Ltd. Kowloon, Hong Kong 2 Shakeel Ahmed Trading P.O.Box 28706, Dubai, UAE 3,96,98,006 CO LLC TOTAL 4,29,46,229

ITA No.1133/Kol/2013 A.Y.2009-10 ITO Wd-12(3) Kol. vs. M/s Jai Vikshu Niketan Pvt. Ltd. Page 3 On question by the AO for genuineness and non-deduction of TDS on the commission expenses the assessee submitted that it was necessary to appoint the foreign agents for getting the export orders in the competitive markets. Regarding the genuineness of the commission expenses the assessee submitted the copies of the commission bills, transaction wise details of the commission along with the rate of commission and payment details of the commission. Regarding the non-deduction of TDS the assessee submitted that the TDS has not been deducted from the commission expenses on the basis of the following reasons:- 1. The commission agents are non resident person. 2. The commission agents are providing services outside India. 3. The commission paid or payable to the commission agents are related to the services provided out of India. 4. The commission agents are not having any permanent establishment in India. 5. The commission was paid directly to the agent outside India.

As the commission was not taxable in India therefore the question of deduction of TDS does not arise. However, the AO disallowed the commission expenses by observing that i) The assessee failed to substantiate whether the above companies are actually in existence. ii) The foreign companies do not have any permanent establishment in India as well as business connection in India. Provision for Non deduction of TDS will be applicable only after fulfilling the criteria as discussed above. iii) The rate of commission paid to the agents was worked out @ 8% to 10% of the export order which is quite higher than the market rate. iv) Out of the total commission due i.e. Rs 4,29,46,229.00 a sum of Rs. 3,96,98,006.00 is unpaid till date for the FY 2008-09 which is not a common scenario. There was not any documentary evidence that the agents are putting effort to get release their payments.

ITA No.1133/Kol/2013 A.Y.2009-10 ITO Wd-12(3) Kol. vs. M/s Jai Vikshu Niketan Pvt. Ltd. Page 4 v) The assessee has shown the commission payable under the head “Sundry Creditors for goods” although there is no import claimed by the assessee during the year.

In view of above the AO treated the commission expense claimed by the assessee amounting to Rs.4,29,46,229/- as not genuine expense and added back to the total income of the assessee.

Appeal on grounds no. 2 and 4 are against the addition of commission expenses of rs.4,29,46,229/-. The fact of the case is that the assessee is engaged in the business of synthetic fabrics, sarere, arna, baby wear etc. The AO found from the audited accounts that the assessee has made payment of Rs.4,29,46,229/- as commission to different parties. The AO in his assessment order has given the finding that it is unbelievable that for sales made during FY 2008-09 commission to foreign agents have not been paid till date. The further

ITA No.1133/Kol/2013 A.Y.2009-10 ITO Wd-12(3) Kol. vs. M/s Jai Vikshu Niketan Pvt. Ltd. Page 5 observed that it is not known whether sold said party is pursuing for payments or not. The assessee could not furnish documentary evidences in support of that. Therefore, the AO added the amount of commission of Rs.42946229/-. During the appellate proceeding the AR submitted many documents showing the payment of commission etc. since AO has written in his assessment order that all particulars details and document were not furnished during the assessment proceeding. Therefore, documents and details filed by the AR were sent to the AO for the remand report. The AO has submitted his remand report vide letter no. ITO Wd-12(3)/Kol/AABCJ3771F/12-13/1141 dt. 19-12-2012. In his remand report the AO has mentioned that the assessee has claimed to have paid Rs.3248223/- to Aaypee International Ltd. and Rs.3,96,98,006/- to M/s Shakeel Ahmed Trading Co. LC. The AO in the remand report has submitted that ‘As the parties are not maintaining head office in India, verification has been restricted to the study of the documentary evidences produced and from internet surfing. The assessee could not produce original copies of a number of documents furnished e.g. commission bills, agreement copies etc. the assessee vide letter dt. 118-12-2012, has stated that these were received over fax or e-mails either in MS Word format or JPEG format and it is not possible for the assessee to furnish original print out of these documents. The existence of the above two parties has been found from the internet surfing and print out of 23 pages of documents downloaded from the internet have been served on the A/R of the assessee during the course of hearing for furnishing of written explanation in this regard.’

The AO has also mentioned in his remand report that out of total amount of Rs.39698006/- against Shakeel Ahmed Trading Co. an amount of Rs.26984278/- have already been paid as per the ledger maintained by the assessee. Regarding Aaypee International Ltd., the total amount of commission of Rs.3248223/- has been paid as per the assessee’s ledger. I have considered the finding of the AO in the assessment order where he had rejected the claim of the assessee of commission payment as the assessee could not produce details. I have also considered the finding given by the AO in the remand report as well as the written submission filed by the AR. I find that from the remand report it is clear that the assessee filed all the relevant documents to the satisfaction of the AO and the AO has verified them and he has given his finding that the total commission payment to M/s Aapyee International Ltd. was made. The assessee has also paid major portion of the commission to M/s Shakeel Ahmed Trading Co., thus, it is clear from the remand report that the assessee has made payment of commission and has produced all relevant documents to the AO for verification. Keeping in view the finding of the AO in the remand report, assessee’s appeal on grounds no. 2 and 4 are allowed.

ITA No.1133/Kol/2013 A.Y.2009-10 ITO Wd-12(3) Kol. vs. M/s Jai Vikshu Niketan Pvt. Ltd. Page 6 assessment order has mentioned that the assessee failed to deduct tax at source on the commission payment to parties already mentioned above. The AR in his written submission has mentioned that both the parties to whom the commission has been paid, are foreign companies and they don’t have any office establishment anywhere in India. In the remand report also the AO has pointed out that Aayppe International ltd. is a Hong Kong based trading company an M/s Shakeel Ahmed Trading Company is based in Dubai UAE. In the remand report the AO has downloaded the details of Aaypee International Ltd. From the Internet which shows that an office of this company has been opened in Delhi and it is a member of the Web Hosting Organization since 2009. The AR has submitted that this company might have opened it office in Delhi in or after 2009, but definitely as it is clear from the internet site it did not have any office in India during FY 2008-09. The AR has further submitted that as both the companies are foreign companies having no office in India, therefore, there is no question of deducting tax from them. The AR has submitted the case of Transmission Corporation of India 239 ITR 587 wherein the Hon'ble Supreme Court has held “if payment to non-resident is not chargeable to tax under the Indian Income Tax Act, then no TD has to be deducted.”.

I have considered the finding of the AO in the assessment order and the remand report and the submission filed by the AR. It is clear that commission was paid to foreign companies which had no agent or office in India as it is clear from the remand report of the AO. Therefore, AO's finding in the assessment order that the assessee failed to deduct tax at source on commission payment is not justified. Hence, assessee’s appeal on ground no. 3 is allowed.”

Being aggrieved by the order of ld. CIT(A), Revenue is in appeal before us.

ITA No.1133/Kol/2013 A.Y.2009-10 ITO Wd-12(3) Kol. vs. M/s Jai Vikshu Niketan Pvt. Ltd. Page 7 On the other hand the ld. AR filed a paper book comprising of pages from 1 to 136 and submitted that the export business of the assessee has increased many folds after taking the services from the commission agents. The commission expenses to M/s SATC cannot be subject to dispute on the ground that the activities as depicted on its website are not matching with the assessee. The ld. AR in support of his claim has submitted the ledger copies, bills, bank payment advices, copy of bank statement, certificate that the parties have no permanent establishment in India from both the above stated parties which are placed on record in the form of the paper book. The ld. AR relied on the order of the ld. CIT(A).

From the above facts, we find that the question of TDS from the payment of commission arises in the aforesaid facts & circumstances when the payee has some permanent establishment in India. In the instant case the ld. DR failed to bring any substantive evidence to prove that the payee has any permanent establishment in India. Similarly, we also find that the services were rendered by the aforesaid commission agents outside India. Therefore the income to these commission agents has not accrued or arose in India. Accordingly the payment of the commission to the foreign agents is governed by the provisions of section 195 of the Act. Therefore in our considered view we hold that the assessee was not liable to deduct the TDS from the payment of the commission. In this connection we rely in the case of GE India

ITA No.1133/Kol/2013 A.Y.2009-10 ITO Wd-12(3) Kol. vs. M/s Jai Vikshu Niketan Pvt. Ltd. Page 8 Technology Centre Pvt. Ltd. Vs. CIT & ANR 327 ITR 456 where the Hon’ble Supreme Court of India has held as under:- “The most important expression in s. 195(1) consists of the words "chargeable under the provisions of the Act". A person paying interest or any other sum to a non-resident is not liable to deduct tax if such sum is not chargeable to tax under the IT Act. For instance, where there is no obligation on the part of the payer and no right to receive the sum by the recipient and that the payment does not arise out of any contract or obligation between the payer and the recipient but is made voluntarily, such payments cannot be regarded as income under the IT Act. It may be noted that s. 195 contemplates not merely amounts, the whole of which are pure income payments, it also covers composite payments which has an element of income embedded or incorporated in them. Thus, where an amount is payable to a non-resident, the payer is under an obligation to deduct tax at source in respect of such composite payments. The obligation to deduct tax at source is, however, limited to the appropriate proportion of income chargeable under the Act forming part of the gross sum of money payable to the non-resident. This obligation being limited to the appropriate proportion of income flows from the words used in s. 195(1), namely, "chargeable under the provisions of the Act". It is for this reason that vide Circular No. 728, dt. 30th Oct., 1995 the CBDT has clarified that the tax deductor can take into consideration the effect of DTAA in respect of payment of royalties and technical fees while deducting tax at source. The application of s. 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 to a non-resident but is not sure as to what should be the portion so taxable or is not sure as to the amount of tax to be deducted. In such a situation, he is required to make an application to the ITO(TDS) for determining the amount. It is only when these conditions are satisfied and an application is made to the ITO(TDS) that the question of making an order under s. 195(2) will arise. While deciding the scope of s. 195(2) it is important to note that the tax which is required to be deducted at source is deductible only out of the chargeable sum. This is the underlying principle of s. 195. Hence, apart from s. 9(1), ss. 4, 5, 9, 90, 91 as well as the provisions of DTAA are also relevant, while applying TDS provisions. Reference to ITO(TDS) under s. 195(2) or s. 195(3) either by the non-resident or by the resident payer is to avoid any future hassles for both resident as well as non-resident. Secs. 195(2) and 195(3) are safeguards. The said provisions are of practical importance. From this it follows 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. If the contention of the Department that the moment there is remittance the obligation to deduct tax at source arises is to be accepted then the words "chargeable under the provisions of the Act" in s. 195(1) would be obliterated. The said expression in s. 195(1) shows that the remittance has got to be of a trading receipt, the whole or part of which is liable to tax in India.

ITA No.1133/Kol/2013 A.Y.2009-10 ITO Wd-12(3) Kol. vs. M/s Jai Vikshu Niketan Pvt. Ltd. Page 9 The payer is bound to deduct tax at source only if the income is assessable in India. If income is not so assessable, there is no question of tax at source being deducted.—Transmission Corporation of A.P. Ltd. vs. CIT (1999) 155 CTR (SC) 489 : (1999) 239 ITR 587 (SC) and Vijay Ship Breaking Corpn. & Ors. vs. CIT (2008) 219 CTR (SC) 639 : (2008) 14 DTR (SC) 74 : (2009) 314 ITR 309 (SC) relied on; CIT vs. Cooper Engineering Ltd. (1968) 68 ITR 457 (Bom) impliedly approved. Sec. 195 falls in Chapter XVII which deals with collection and recovery. Chapter XVII-B deals with deduction at source by the payer. On analysis of various provisions of Chapter XVII one finds use of different expressions, however, the expression "sum chargeable under the provisions of the Act" is used only in s. 195. In none of the provisions the expression "sum chargeable under the provisions of the Act" is found, which, is an expression used only in s. 195(1). It follows, therefore, that the obligation to deduct tax at source arises only when there is a sum chargeable under the Act. Sec. 195(2) is not merely a provision to provide information to the ITO (TDS). It is a provision requiring tax to be deducted at source to be paid to the Revenue by the payer who makes payment to a non-resident. Therefore, s. 195 has to be read in conformity with the charging provisions, i.e., ss. 4, 5 and 9. This reasoning flows from the words "sum chargeable under the provisions of the Act" in s. 195(1). The fact that the Revenue has not obtained any information per se cannot be a ground to construe s. 195 widely so as to require deduction of tax at source even in a case where an amount paid is not chargeable to tax in India at all. Sec. 195 cannot be read, as suggested by the Department, namely, that the moment there is remittance the obligation to deduct tax at source arises. If such a contention is accepted it would mean that on mere payment income would be said to arise or accrue in India. Therefore, as stated earlier, if the contention of the Department was accepted it would mean obliteration of the expression "sum chargeable under the provisions of the Act" from s. 195(1). While interpreting a section one has to give weightage to every word used in that section. While interpreting the provisions of the IT Act one cannot read the charging sections of that Act de hors the machinery sections. The Act is to be read as an integrated code. Hence, the provision relating to TDS applies only to those sums which are chargeable to tax under the IT Act. If the contention of the Department that any person making payment to a non-resident is necessarily required to deduct tax at source is accepted then the consequence would be that the Department would be entitled to appropriate the moneys deposited by the payer even if the sum paid is not chargeable to tax because there is no provision in the IT Act by which a payer can obtain refund. Sec. 237 r/w s. 199 implies that only the recipient of the sum, i.e., the payee could seek a refund. It must therefore follow, if the Department is right, that the law requires tax to be deducted on all payments. The payer, therefore, has to deduct and pay tax, even if the so-called deduction comes out of his own pocket and he has no remedy whatsoever, even where the sum paid by him is not a sum chargeable under the Act. The interpretation of the Department, therefore, not only requires the words "chargeable under the provisions of the Act" to be omitted, it also leads to an absurd consequence.

ITA No.1133/Kol/2013 A.Y.2009-10 ITO Wd-12(3) Kol. vs. M/s Jai Vikshu Niketan Pvt. Ltd. Page 10 The interpretation placed by the Department would result in a situation where even when the income has no territorial nexus with India or is not chargeable in India, the Government would nonetheless collect tax. Sec. 195(2) provides a remedy by which a person may seek a determination of the "appropriate proportion of such sum so chargeable" where a proportion of the sum so chargeable is liable to tax. The entire basis of the Department's contention is based on administrative convenience in support of its interpretation. There is no merit in the contention. As stated hereinabove, s. 195(1) uses the expression "sum chargeable under the provisions of the Act." One has to give weightage to those words. Further, s. 195 uses the word 'payer' and not the word "assessee". The payer is not an assessee. The payer becomes an assessee-in- default only when he fails to fulfill the statutory obligation under s. 195(1). If the payment does not contain the element of income the payer cannot be made liable. He cannot be declared to be an assessee-in-default. The contention of the Department is based on an apprehension which is ill founded. The payer is also an assessee under the ordinary provisions of the IT Act. When the payer remits an amount to a non-resident out of India he claims deduction or allowances under the IT Act for the said sum as an "expenditure". Under s. 40(a)(i), inserted vide Finance Act, 1988 w.e.f. 1st April, 1989, payment in respect of royalty, fees for technical services or other sums chargeable under the IT Act would not get the benefit of deduction if the assessee fails to deduct tax at source in respect of payments outside India which are chargeable under the IT Act. This provision ensures effective compliance of s. 195 relating to TDS in respect of payments outside India in respect of royalties, fees or other sums chargeable under the IT Act. In a given case where the payer is an assessee he will definitely claim deduction under the IT Act for such remittance and on inquiry if the AO finds that the sums remitted outside India comes within the definition of royalty or fees for technical service or other sums chargeable under the IT Act then it would be open to the AO to disallow such claim for deduction. Similarly, vide Finance Act, 2008, w.e.f. 1st April, 2008 sub-s. (6) has been inserted in s. 195 which requires the payer to furnish information relating to payment of any sum in such form and manner as may be prescribed by the Board. Therefore, there are adequate safeguards in the Act which would prevent revenue leakage.—CIT vs. Eli Lilly & Company (India) (P) Ltd. (2009) 223 CTR (SC) 20 : (2009) 21 DTR (SC) 74 : (2009) 312 ITR 225 (SC) relied on; Transmission Corporation of A.P. Ltd. vs. CIT (1999) 155 CTR (SC) 489 : (1999) 239 ITR 587 (SC) distinguished; CIT vs. Samsung Electronics Co. Ltd. & Ors. (2009) 227 CTR (Kar) 335 : (2009) 31 DTR (Kar) 257 and CIT (International Taxation) & Anr. vs. Sonata Information Technology Ltd. (2010) 232 CTR (Kar) 20 : (2010) 38 DTR (Kar) 350 set aside. Since the High Court did not go into the merits of the case on the question of payment of royalty, the impugned judgments of the High Court are set aside and these cases are remitted to the High Court for de novo consideration of the cases on merits. A person paying interest or any other sum to a non-resident is liable to deduct tax under s. 195 only if such sum is chargeable to tax in India and not otherwise.”

ITA No.1133/Kol/2013 A.Y.2009-10 ITO Wd-12(3) Kol. vs. M/s Jai Vikshu Niketan Pvt. Ltd. Page 11 Similarly for the grounds of appeal of the Revenue that the assessee failed to substantiate the genuineness of the expenses we find that the payment has been paid through banking channel, the assessee has produced the copies of the bills of the commission agents. We also find that there is a huge increased in the export turnover of the assessee business. In the earlier year the export turnover of the business of the assessee was Rs.13 crores only and for the year under consideration the turnover from the export business has been shown for Rs. 80 crores. In view of above, we are of the considered opinion that the assessee has justified its commission expenses claimed in the profit and loss account. In this connection we rely in the case of CIT vs Inbuilt Merchant Private Limited in ITAT No. 225 of 2013, G.A. No. 3825 of 2013 where the Jurisdictional High Court of Calcutta has held as under:- “The views expressed by the Assessing Officer are erroneous in law. The Assessing Officer has overlooked the importance of the books of account maintained in the ordinary course of business. Reference in this regard maybe made to sub-section (2) of Section32 of the Indian Evidence Act, 1872. The books of account maintained in the ordinary course of business are relevant and they cannot be discarded in the absence of appropriate reasons. The mere fact that recipient did not reply in some cases or they were not found at the address furnished by the assessee does not in the least prove the fact that they were non existent or that the payments shown to have been made by the assessee were imaginary. With the advancement of technology, it has become possible to sell goods throughout the country through the internet. For that purpose, agents are required throughout the country. The mechanism in that regard has been disclosed by the se and has been recorded in the order of the CIT(Appeals). For the purpose of carrying on its business, the assessee has to recruit the agents. It may not be possible for the assessee to know them personally. Whatever address was furnished to the assessee, has been disclosed to the Income-tax Department. Payments were admittedly mad by cheque after deduction of tax. The tax deducted as source has duly been deposited. The judgment in the case of CIT vs. Precision Finance vt. Ld., reported in 208 ITR 465 relied upon by Mr. Bhowmick does not really assist him. The aforesaid judgment is an authority for the proposition that mere payment by account payee cheque cannot establish that the transactions was genuine, but in the case before us. Besides the fact that payment was made by chequue, there are other pieces of evidence available which are follows: a) Books of Accounts maintained by the assessee in the ordinary course of business; b) Deduction of Tax at source; c) Deposit of the money deducted at source; d) Particulars of the recipient were duly furnished; we are, as such, of the opinion that the views

ITA No.1133/Kol/2013 A.Y.2009-10 ITO Wd-12(3) Kol. vs. M/s Jai Vikshu Niketan Pvt. Ltd. Page 12 expressed by the learned Tribunal are unexceptionable. We, therefore refuse to admit the appeal. The appeal is thus dismissed.”

Respectfully following the precedent as above we find no reason to interfere with the finding arrived by the Ld. CIT(A). In the circumstances, this issue of Revenue’s appeal is dismissed. Accordingly, AO is directed.

/True Copy/ By order/आदेश से,

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