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Income Tax Appellate Tribunal, DELHI BENCH: ‘G’: NEW DELHI
Before: SH. VIJAY PAL RAO & SH. O.P. KANT
Appellant by Sh. Himanshu Sinha, Adv. & Ms. Vrindra Tolshan, Adv. Respondent by Sh. Anuj Arora, CIT (DR) Date of hearing 23.12.2015 Date of pronouncement 24.02.2016 ORDER PER O.P. KANT, J.M.: AY: 2011-12 This appeal of the assessee is directed against the order under Section 143(3) read with section 144C(1) of the Income-tax Act, 1961 (for short “the Act”) passed by the Assessing Officer on 05.01.2015 raising following grounds of appeal:
1. That on the facts and in the circumstances of the case, the assessment order passed by the Learned Assessing Officer (“AO”) is bad in law.
2. That the Learned Assessing Officer and Learned Dispute Resolution Panel have erred in facts and in law”
2 & 1033/Del/2015 AY: 2011-12 (a) in treating a sum of Rs. 71,85,25,637/- as the appellant’s revenue receipts from Hindustan Copper Ltd.’; (b) in disallowing an equivalent amount of Rs. 71,85,25,637/- u/s 40(a)(i) of the Income Tax Act, 1961 by treating the same as a revenue expenditure credited to India Resources Ltd. on which tax should have been deducted as source by the appellant; (c) in charging interest u/s 234B of the Income-tax Act, 1961. The appellant craves leave to amend, modify or add to these grounds. These grounds are in prejudice to each other.
The facts in brief are that during the relevant year the assessee was an non-resident company incorporated under the laws of Australia and was having a project office in India. In April, 2007, the assessee company was awarded a contract by M/s. Hindustan Copper Ltd. (‘HCL’) for re-commissioning, operating and maintaining certain copper mines located at ‘Surda’, Jharkhand and to supply copper concentrate at specified rates. The assessee filed its return of income on 30.09.2011 declaring NIL income. The Assessing Officer held that the assessee company sub-contracted its entire work to another non-resident company M/s IRL, however, the tax was not deducted at source on amounts payable to M/s. IRL and, therefore, in the draft assessment order, the Assessing Officer disallowed the deduction of expenditure claimed of Rs. 71,85,25,637/- , under Section 40a(i) of the Act. The assessee filed objections before the DRP against the disallowance stating that the contract awarded to the assessee company by the HCL was assigned to ‘IRL’, another company through a written contract dated 05.04.2007 and through this contract the assessee had transferred/assigned its obligation and benefits to ‘IRL’ and agreed to Act as an 3 & 1033/Del/2015 AY: 2011-12 agent, attorney and trustee to IRL only. It was submitted by the assessee that only activity that carried out was raising of invoices on ‘HCL’ on behalf of ‘IRL’ and complying with income-tax and company law regulation and the assessee’s business was never set up and did not carry the business in India. Thus, as per the Article 5 of the India Australia Double Tax Avoidance Agreement, the project was not a Permanent Establishment. However, the DRP did not accept the contention and according to DRP the HCL gave contract to the assessee and the assessee further sub-contracted the work to IRL only. Another argument of the assessee regarding diversion of income by overriding the title was also not accepted by the DRP, relying on the judgment of the Hon’ble Supreme Court in the case of Commissioner of Income Tax Vs. Shitaldas Tirathdas, 41 ITR 367(SC). The DRP held that the payment made by the ‘HCL’ accrued to the assessee before it went to the IRL and therefore, it was in the nature of application of income rather than diversion of income by overriding title. On the directions of the DRP, the Assessing Officer passed final assessment order under section 143(3) read with 144C(13) of the Act . Aggrieved with the final order of the Assessing Officer, the assessee is before us.
Ground no. 1 is general nature, and not required to adjudicate upon. 4. Ground no. 2 (a) & 2 (b) are related to sole issue of disallowance of Rs. 71,85,25,637/- under Section 40a(i) of the Act. Learned Authorized Representative submitted that the assessee did not have business in India and it 4 & 1033/Del/2015 AY: 2011-12 was not having any right to receive any income and it was only an agent of M/s. IRL. He also argued that section 195 of the Act did not apply as neither any income was being paid, nor credited by the assessee in favour of the IRL. He further argued that after following CBDT Circular no. 3/15, dated February 12, 2015, no disallowance under Section 40a(i) of the Act could be made as the IRL did not have any taxable income in the year under consideration. The Ld AR also made written submission in support of the arguments made. 4.1 On the other hand, learned Commissioner of Income Tax(Departmental Representative) relied on the orders of the lower authorities. 4.2 We have considered the rival submissions and perused the material on record. We have also seen that though the assessee claimed that entire contract was assigned to M/s IRL and it was acting only as agent but the terms of agreement reflect that the assessee transferred its income generating asset i.e. the contract, in exchange of equity stake in M/s IRL, however, the Assessing Officer from the accounts maintained by the assessee understood as subcontracting of the contract to M/s IRL and held that the assessee did not deduct TDS on amount payable to M/s IRL. Now whether, the assessee was liable for deduction of tax at source on amount shown as payable to M/s IRL in books of accounts of the assessee or not, firstly, we take up the argument of the learned Authorized Representative that the issue in dispute was covered by the CBDT Circular No. 3/15, dated February 12, 2015. The relevant paragraph of the said Circular is reproduced as under:
5 & 1033/Del/2015 AY: 2011-12 “3. Central Board of Direct Taxes has already issued instruction No. 02/2014 dated 26.02.2014 [F.No. 500/33/2013-FTD-I] regarding deduction of tax at source under sub-section (1) of Section 195 read with section 201 of the Act relating to payments made to non-residents in cases where no application is filed by the deductor for determining the sum so chargeable under sub-section (2) of Section 195 of the Act. Vide this instruction, Board has clarified that in cases where tax is not deducted at source under Section 195 of the Act, the Assessing Officer shall determine the appropriate portion of the sum chargeable to tax, as mentioned in sub- section (1) of section 195, to ascertain the tax-liability on which the deductor shall be deemed to be an assessee in default under Section 201 of the Act. It has further clarified that such appropriate portion of the said sum will depend on the facts and circumstances of each case taking into account the nature of remittances, income component therein or any other fact relevant to determine such appropriate proportion.
As disallowance of amount under Section 40(a)(i) of the Act in case of a deductor is interlinked with the sum chargeable under the Act as mentioned in section 195 of the Act for the purpose of tax deduction at source, the Central Board of Direct Taxes, in exercise of powers conferred under Section 119 of the Act, hereby clarifies that for the purposes of making disallowance of ‘other sum chargeable’ under section 40(a)(i) of the Act, the appropriate portion of the sum which is chargeable to tax under the Act shall form the basis of such disallowance and shall be the same as determined by the Assessing Officer having jurisdiction for the purpose of sub-section (1) of section 195 of the Act as per Instruction No. 2/2014, dated 26.02.2014 of CBDT. Further, where determined of ‘other sum chargeable’ has been made under sub-sections (2), (3) or (7) of Section 195 of the Act, such a determination will form the basis for disallowance, if any, under Section 40(a)(i) of the Act.
4.3 According to the said Circular, the disallowance under Section 40a(i) of the Act, in case of deductor interlinked with the sum chargeable under the Act as mentioned in section 195 of the Act for the purpose of tax deduction at source, and the CBDT, in exercise of powers conferred under Section 119 of the, clarified that for the purpose of making disallowance of ‘other sum chargeable’ under Section 40a(i) of the Act, the appropriate portion of the sum which is 6 & 1033/Del/2015 AY: 2011-12 chargeable to tax under the Act shall form the basis of such disallowance and shall be the same as determined by the Assessing Officer having jurisdiction for the purpose of sub-section (1) of Section 195 of the Act as per Instruction No. 2/2014, dated 26.023.2014 of the CBDT. 4.4 It was brought to our notice by the ld AR that in the year under consideration the returned income of M/s. IRL was a loss and, therefore, the assessee was not required to deduct tax at source applying the above Circular. Looking to the above submission, we feel appropriate to restore the matter to the file of Assessing Officer for verification of the compliance of the aforesaid Circular and if the assessee fulfills the conditions of the circular, no tax was required to be deducted at source and accordingly, the disallowance under section 40(a)(i) of the Act is not warranted in the case of the assessee. While making verification, the Assessing Officer is also directed to provide sufficient opportunity of being heard to the assessee. As the assessee is eligible for relief in view of the above argument, the other arguments of the assessee are not discussed for adjudication now. Accordingly, this ground of the assessee is allowed for statistical purposes.
Ground no. 2 is related to charging of interest under Section 234B of the Act. The ld AR submitted that the ground is consequential in nature and the ld CIT DR also concurred on this submission. In view of the above, we direct the Assessing Officer to appropriately vary the interest under Section 234B of the 7 ITA Nos. 5734 & 1033/Del/2015 AY: 2011-12 Act after giving effect of our decision on the ground no. 1 raised by the assessee. This ground is also accordingly allowed for statistical purposes.
In the result, the appeal is allowed for statistical purposes.
This appeal preferred by the assessee is directed against the rejection of rectification application under Section 154 of the Act by the Assessing Officer, raising following grounds: “
That on the facts and circumstances of the case, the learned Assessing Officer erred in rejecting the rectification application under Section 154 of the Income Tax Act, 1961.”
8. At the outset, the learned Commissioner of Income Tax (Departmental Representative) submitted that the issue of disallowance under Section 40a(i) was raised in application under Section 154 of the Act before the Assessing Officer which was rejected by the Assessing Officer. He submitted that the issue in appeal has already been covered by the appeal of the assessee in ITA No. 1033/Del/2015.
9. Learned Authorized Representative also agreed with the above submission of the learned Commissioner of Income Tax (Departmental Representative).
10. We have heard the rival submissions and we are of the opinion that the issue already stands covered and allowed in favour of the assessee. Thus, this ground raised has been rendered only academic and not required to adjudicate upon. Thus, the ground being rendered infractuous, we dismiss the same.