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Income Tax Appellate Tribunal, “D” BENCH, CHENNAI
Before: SHRI CHANDRA POOJARI & SHRI CHALLA NAGENDRA PRASAD
आदेश / O R D E R
PER CHANDRA POOJARI, ACCOUNTANT MEMBER This appeal by Revenue is directed against the order of the Commissioner of Income Tax (Appeals)-IV, Chennai, dated 30.07.2014 for the assessment year 2011-2012.
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The first ground in this appeal is with regard to deleting the
restriction of deduction u/s.80IA to the extent of �62,26,739/- on
windmill power generation.
The facts of the issue are that the assessee company engaged
in the manufacture and export of steel forgings, has plants
manufacture of steel forgings and has for the generation of electricity
by windmill located in Nagercoil District and the entire electricity
generated was for self consumption and no part of the same was sold.
The assessee filed its return for the assessment year 2011-12 on
30.09.2011 declaring an income of �25,47,94,827/- and the
assessment was completed under section 143(3) of the Act
determining tax demand at �33,55,41,210/- by restricting deduction
u/s.80IA(4) from �5,28,75,459/- to �4,63,48,720/- and disallowance of
�7,42,19,641/- on foreign agency commission and warehousing and
other charges incurred overseas u/s.40(a)(i).
3.1 The Assessing Officer on the other hand has observed
that as per 80lA(5), the profits and gains of eligible business to
which the provisions of subsection(1) apply shall, for the
purposes of determining the quantum of deduction under the
sub-section for the assessment year or any subsequent
assessment year needs to be computed as if such eligible
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business were the only source of income of the assessee during
the previous year relevant to the initial assessment year as in the
instant case, the wind energy generation from the windmill units
and the entire business profits/loss are sourced from this
business which forms the basis for the computation of deduction.
A unit-wise claim of deduction does not stand in line with the connotation of the term eligible business and hence the activity of wind energy generation through wind mill units was to be
treated as one eligible business and brought forward losses are
to be adjusted against profits and gains for the purpose of
deduction u/s 80IA.
3.2. Further, the Assessing Officer observed that since
allowability of deduction u/s 801A(4) is governed by the
provisions of Sec 801A(5).The deduction u/s 80IA would be
eligible only on such surplus profits after setting off of the
brought forward losses and unabsorbed depreciation. The AO
has relied on the decision of the Special Bench of ITAT,
Ahmedabad in the case of ACIT Vs. Gold Mine and Shares &
Finance Pvt. Ltd. (2008) 113 ITD 209 as well as the ITAT,
Hyderabad in the case of Hyderabad Chemicals Supplies Ltd. Vs.
ACIT, Hyderabad in support of her contention and as such the
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deduction u/s 80IA was recomputed after adjusting the brought
forward losses of earlier years and the eligible business profit on
which the assessee was entitled to claim deduction has
accordingly been restricted from �5,28,75,459/- as returned by
the assessee and restricted to �4,63,48,720/-. Aggrieved, the
assessee preferred an appeal before the Commissioner of
Income Tax (Appeals).
The Commissioner of Income Tax (Appeals) placing reliance on
the judgment of the jurisdictional high court in the case of
Velayudhaswamy Spinning Mills (P) Ltd vs. ACIT 340 ITR 477, wherein
held observed that
‘……………….From a reading of Se. 80IA(5), it is clear that the eligible business were the only source of income, during the previous year relevant to the initial assessment year and every subsequent assessment years. When the assessment exercises the option, the only losses of the years beginning from initial assessment year alone are to be brought forward and no losses of earlier years which were already set off against the income of the assessee. Looking forward to a period of ten years from the initial assessment is contemplated. It does not allow the Revenue to look backward and find out if there is any loss of earlier years and bring forward notionally even though the same were set off against other income of the assessee and the set off against the current income of the eligible business. Once the set off is taken place in earlier year against the other income of the assessee, the Revenue cannot rework the set off amount and bring it notionally. A fiction created in sub-section does not contemplates to bring set off amount notionally. The fiction is created only for the limited purpose and the same
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cannot be extended beyond the purpose for which it is created…….’’ The Commissioner of Income Tax (Appeals) allowed the claim of the
assessee. Against this, the Revenue is in appeal before us.
We have heard both the parties and perused the material
available on record. The issue is squarely covered by the judgment of
jurisdictional high court in the case of Velayudhaswamy Spinning Mills
(P) Ltd (cited supra). Being so, we are inclined to confirm the order of
the Commissioner of Income Tax (Appeals) on this issue. This ground
of the Revenue is dismissed.
The next ground is with regard to deleting the disallowance
of �7,42,19,641/- made u/s.40(a)(i) r.w.s 195 of the Income Tax Act.
The fact of the issue are that that the assessee has incurred
foreign agency commission of �4,47,37,475/- and warehousing
and other charges incurred overseas of �3,00,82,166/-, during
the year. It has been submitted by the ld. Authorised
Representative for assessee that in the present case, the
agents were operating outside the taxable territories and the
commission received also were outside the taxable territories
and it had no authority to enter into any contract on behalf of
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the local manufacturers and had no authority to bind the
principal by their act without the written confirmation from the
principal, and the commission paid to the non-residents has no
relevance to the profits earned by the resident but is linked with
the receipt of full payment by the customers to the principals.
As such the question of non-resident having business connection
in India does not arise.
7.1 The Assessing Officer on the other hand, disallowed
�7,42,19,641/- u/s.40(a)(i) on foreign commission and warehousing
and other charges broadly for the following reasons:-
(i) No tax was deducted on the commission paid to the foreign agents as required under section 195 of the Act.
(ii) Board’s circulars No.23 dated 23.07.1969, Circular No.163 dated 29.05.1975 and circular No.786 dated 07.02.2000 allowing foreign agent commission without deduction of tax under section 195 was withdrawn by Circular No.7 dated 22.10.2009.
(iii) The Assessing Officer has relied on the Hon’ble Authority for Advance Ruling in the case of SKF Boilers and Driers Pvt. Ltd wherein it has been held that "Sections 5 and 9 of the Act thus proceed on the assumption that Income has a situs and the situs has to be determined according to the general principles of law. The words 'accrue' or 'arise' occurring in Section 5 have more or less a synonymous sense and Income is said to accrue or arise when the right to receive It comes Into existence. No doubt the agents rendered services abroad and have solicited orders, but the right to receive the commission arises In
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India when the order is executed by the applicant in India. The fact that the agents have rendered services abroad in the form of soliciting the orders and the commission is to be remitted to them abroad are wholly irrelevant for the purpose of determining the situs of their Income. We follow the ruling of this Authority in (Rajive Malhotra MR 671 of 2005, 284 JTR 564). We therefore hold that the income arising on account of commission payable to the two agents is deemed to accrue and arise in India, and is taxable under the Act in view of the specific provision of Section 5(2)(b) read with section 9(1)(1) of the Act. The provision of section 195 would apply, ad the rate of tax will be as provided under the Finance Act for the relevant year."
7.2 The Assessing Officer has also relied on the decision of the
Hon'ble Supreme Court in the case of Transmission Corporation
of AP Ltd. v. CIT 105 Taxman 742, wherein it has been held that
the assessee has an obligation to obtain NIL deduction certificate
from the AO even when the assessee feels that the payment is
not liable to TDS, which the assessee failed to do in this case.
The Assessing Officer disallowed a sum of �7,42,19,641/-
Aggrieved, the assessee preferred an appeal.
On appeal the Commissioner of Income Tax (Appeals)
observed that the following facts of the case, which are undisputed
that • The agents were non-residents • The non-resident agents were operating their
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business activities outside India • The commission paid relate to services provided outside India, namely, procuring export orders warehousing and follow up of payments • The non-resident agents did not have any permanent establishment or permanent business place in India • The commission was remitted to the non-residents directly outside India.
He relied on the judgment of Supreme Court in the case of
GE India Technology Centre P. Ltd. v CIT (2010) 327 ITR 456 wherein it was held that tax deducted at source obligations u/s
195(1) arises only if the payment is chargeable to tax in the
hands of the non-resident recipient. Therefore, merely because a
person has not deducted tax at source or a remittance abroad it
cannot be inferred that the person making the remittance,
namely the assessee in the instant case, has committed a default
in discharging his tax withholding obligations because such
obligations come into existence only when the recipient has a tax
liability in India. The underlying principle was that tax
withholding liability of the payer was inherently a vicarious
liability on behalf of the recipient and therefore
when the recipient does not have the primary liability to be
taxable in respect of income embedded in the receipt, the
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vicarious liability of the payer cannot but be ineffectual. This
vicarious tax withholding liability cannot be invoked, unless
primary tax liability of the recipient is established.
Further, the Commissioner of Income Tax (Appeals)
observed that just because the payer has not obtained a specific
declaration from the revenue authorities to the effect that the
recipient is not liable to be taxed in India in respect of the income
embedded in the particular payment, the AO cannot proceed on
the basis that the payer has an obligation to deduct tax at source.
He still has to demonstrate and establish that the payee has a tax
liability in respect of the income embedded in the impugned
payment
In the instant case, it is seen, admittedly, that the non-
resident agents were only procuring orders and warehousing for
the assessee and no other services were rendered other than the
above. As the non- residents were not providing any technical
services to the assessee the commission payment made to non-
residents does not fall into the category of "fees of technical
services" and therefore Explanation [2] to Section 9(1)(vii) has no
application to the facts of the assessee's case either.
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The Commissioner of Income Tax (Appeals) further
observed that the Hon'ble Supreme Court in the case cited
supra has held that the assessee is not liable to deduct TDS
when the non-resident agents provided services outside India
and as such commission payments made to them cannot be
treated as income deemed to accrue or arise in India and
therefore the provisions of Sec.195 has no application in such
cases; and in order to invoke the provisions of Sec.195 of the Act
income should be chargeable to tax in India, which is clearly not
so in the instant case. In view of the above discussion and
respectfully following the judgement of the Hon'ble Supreme
Court in the case of GE India Technology Centre P. Ltd. v CIT
327 ITR 456, he directed the Assessing Officer to delete the
addition made towards foreign agency commission, warehousing
and other charges u/s 40(a)(i) of the Act. According, the
Commissioner of Income Tax (Appeals) allowed this ground.
Against this, the assessee is in appeal before us.
We have heard both the sides and perused the material on
record. In our opinion, this issue is squarely covered by the earlier
order of the Tribunal in the assessee’s own case for the assessment
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year 2010-2011 in ITA No.2311/Mds/2013 vide order dated
28.03.2014. In the said order, the Tribunal observed as under:-
‘’5. We have heard both parties and gone through the case file. As already stated hereinabove, the CIT(A), whilst deleting the impugned addition u/s 40(a)(i) pertaining to overseas payments made by the assessee on account of commission, warehousing and other charges, has followed order of the 'tribunal'(supra) qua the very issue. On being granted opportunity, the Revenue has failed to prove that these expenses are liable to be taxed in India as income in the hands of concerned payees or any services had been rendered in India. The Revenue submits that the 'tribunal's’ order has not been become final and its appeal is pending before the hon'ble high court. In our considered opinion, mere pendency of an appeal involving the same issue against the order of the 'tribunal' is no ground to adopt a different approach in the impugned assessment year. Thus, we agree with the findings of the CIT(A) under challenge and reject grounds raised by the Revenue.”
Similar view was also taken by the Mumbai Bench in the case of Vilas
N. Tamhankar in ITA No.4522/Mum/2013 for the assessment year
2009-2010, vide order dated 21.11.2014, and same view was also
taken by the jurisdictional High Court in the case of CIT vs. Faizan
Shoes Pvt. Ltd, 367 ITR 155 (Mad) and further in the case of Brakes
India Ltd. vs. DCIT (LTU) (144 ITD 403) the co-ordinate Bench of the
Tribunal, it was held that
In our opinion, nature of services mentioned above will come not within the definition of “fees for technical services” given under explanation 2 to Section 9(1)(vii) of the Act. By virtue of such services, the concerned recipients had not made available to the assessee any new technic or skill which assessee could use in its business. The services rendered by the said parties related to clearing, warehousing and freight charges, outside India. The logistics service rendered was essentially warehousing facility. In our opinion, this cannot be
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equated with managerial, technical or consultancy services. Even if it is considered as technical service, the fee was payable only for services utilized by the assessee in the business or profession carried on by the said non- residents outside India. Such business or profession of the non-residents, earned them income outside India. Thus, it would fall within the exception given under sub-clause (b) of Section 9(1) of the Act. In any case, under Section 195 of the Act, assessee is liable to deduct tax only where the payment made to non-residents is chargeable to tax under the provisions of the Act. In the circumstances mentioned above, assessee was justified in having a bonafide belief that the payments did not warrant application of Section 195 of the Act. In such circumstances, we are of the opinion that it could not have been saddled with the consequences mentioned under Section 40(a)(i) of the Act. Disallowances were rightly deleted by the ld. CIT(Appeals). No interference is called for. 14. Being so, in our opinion the issue was squarely covered by
assessee’s own case and other judgment (cited supra), we are inclined
to dismiss this ground raised by the Revenue.
In the result, the appeal of the Revenue in ITA
No.2679/Mds/2014 is dismissed.
Order pronounced on Friday, the 19th day of June, 2015, at Chennai.
Sd/- Sd/- (च�ला नागे�� �साद ) (चं� पूजार� ) (CHALLA NAGENDRA PRASAD) (CHANDRA POOJARI) �या�यक सद�य/ JUDICIAL MEMBER लेखा सद�य/ ACCOUNTANT MEMBER चे�नई/Chennai. �दनांक/Dated:19.06.2015. KV आदेश क� ��त�ल�प अ�े�षत/Copy to: 1. अपीलाथ�/Appellant 2.��यथ�/ Respondent 3. आयकर आयु�त (अपील)/CIT(A) 4. आयकर आयु�त/CIT 5. �वभागीय ��त�न�ध/DR 6. गाड� फाईल/GF.
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