M/S STYLAM INDUSTRIES LTD.,CHANDIGARH vs. DCIT, C-1(1), CHANDIGARH

5. The appellant craves leave to add or amend any grounds of appeal before the appeal is heard or is disposed off.

3. Ground Nos. 1, 4 and 5 are general.

4. Ground No. 2 pertains to the issue of the ld. CIT(A) having deleted the addition of export commission of Rs.2,20,71,855/- paid by the assessee to NRIs without deducting TDS.

5. The AO disallowed the expenditure on the commission on exports amounting to Rs.2,20,71,855/-, invoking the provisions of Section 40(a)(ia) of the Income Tax Act, 1961.

The assessee had made payments on the commission as follows : & 960/2017 & & 394/CHD/2019 4 5.1 The AO was of the opinion that these payments were subject to TDS under Section 195 of the Act. Since no TDS had been deducted, the AO disallowed the payments under Section 40A(ia) of the Act. While doing so, the AO observed as follows :

"2.6 The provisions of section 195 are applicable to all payees whether individual or of any other status who are covered under the definition of nonresident as per section 6 of the Income Tax Act. Under this section there is no threshold limit of the amount paid for deduction of TDS i.e. the TDS needs to be deducted on the entire amount without any threshold limit. 2.7 Further another contention of the assessee that the payments have been made abroad is again baseless since the assessee has made payment in India through its bank account in India maintained in State Bank of Patiala (CC 55023969844). As per the provisions of section I 95 the TDS has to be deducted at the time of credit or payment whichever is earlier. Thus the contention of the assessee are unacceptable. 2.8 The provisions of section 195 has to be read in consonance with the provisions of section 5(2) and section 9(1) of the Act which deals with the 'total income of non-resident' and 'income deemed to accrue or arise in India', respectively. The tax deduction becomes mandatory u/s 195 since the income of the non-resident is deemed to accrue or arise in & 960/2017 & & 394/CHD/2019 5 India. It is important to mention here that the non-resident deductee can avail the benefit of DTAA (Double Taxation Avoidance Agreement) to avoid taxation on same income in both countries. Presently India has comprehensive DTAAs with more than 80 countries.Mowever to avail the benefit of DTAA the non-resident deductee has to submit documents with the deductor which includes Tax Residency Certificate (TRC), passport copy, etc. 2.9 In the instant case the assessee has failed to produce any such document to justify his claim of non-deduction of TDS. The circular No.23 of CBDT has been withdrawn vide another circular No. 7/2009 vide which it has been clarified that the circular No.23. could not be interpreted to allow relief to the tax payer which is not in accordance with the provision of section 9 of the Income Tax Act. 2.10 Under section 9(I)(i) income accruing or arising directly or indirectly, through or from any business connection in India or source of income in India shall be deemed to accrue or arise in India. 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. As per section 5 and section 9 of the Act the income is deemed to accrue or arise in India even if the services by commission agents have been rendered abroad. Further since the right to receive the commission arises in India, the income of such commission agents is deemed to accrue or arise in India and accordingly tax deduction would be mandatory u/s 195. In this regard reliance is placed on the judgement of authority of advance ruling in the case of SKF Boilers and Driers Pvt. Ltd. A.A.R. No. 983-984 of 2010 dated 22.02.2012 wherein it is held that the income arising on account of commission payable to the non-resident 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 )(i) of the Act. The provision of section 1 95 would apply, and the rate of tax will be as provided as under the Finance Act for the relevant year."

Ltd.”, A.R.R No. 983 and 984 of 2010, dated 22.02.2012 which is directly on the issue. It has been contended that therefore, the order passed by the ld. CIT(A), deleting the addition correctly made by the AO, concerning the commission of Rs.2,20,71,855/-, paid by the assessee to NRIs without making TDSD, be ordered to be reversed and the addition correctly made by the AO be revived.

8.1 It has been contended that as correctly held by the ld. CIT(A), Sections 5 and 9 of the Income Tax Act, rendered abroad, cannot be taxed in India; that as further correctly held by the ld. CIT(A), once this is so, the provisions of Section 195 are not attracted and so, no question of making TDS on such payments under Section 195 of the Act arose; & 960/2017 & & 394/CHD/2019 8 that the services of the agents were rendered in their respective countries and not in India; that there is nothing on record to show that these services were technical in nature; that the AO had utterly failed to show that there was any business connection in India; that as such, there was no basis for the AO to make the addition in question, which has been rightly deleted by the ld. CIT(A); and that there being no merit whatsoever in the ground raised by the Department, the same be rejected while confirming the well reasoned order passed by the ld. CIT(A).

9.1 As per the provisions of Section 195 of the Act, any person responsible for paying to a non-resident, who is not a company or a foreign company, any interest, as provided in the Section, shall deduct income tax thereon at the rates enforce. & 960/2017 & & 394/CHD/2019 9 9.2 The AO holds the assessee liable under Section 195, observing that all payees covered under the definition of ‘Non Resident” as laid down in Section 6 of the Act, are subject to the provisions of Section 195. As per the AO, Section 5 deals with the total income of a non-resident and Section 9(1) concerns income deemed to accrue or arise in India, the provisions of Section 195 are to be read in consonance with these two provisions. The AO holds that since the income of the assessee non-resident is deemed to accrue or arise in India, TDS under Section 195 is mandatory.

9.3 The AO holds that according to Sections 5 and 9, even if the services have been rendered abroad by the Commission Agents, the income therefrom is deemed to accrue or arise in India and that since the right to receive the commission arises in India, TDS is mandatory under Section 195, the income of the Commission Agents being deemed to accrue or arise in India.

10.1 The observations of the ld. CIT(A) have not been successfully refuted by the Department before us. It remains undisputed that the assessee is making its sales abroad. It has utilized the services of agents who are non- residents. They are residents of Italy, Thailand, Israel and Germany etc. The services were rendered by these agents to the assessee in order to promote the assessee's sales in the respective country of the agent. Payment of commission was done by the assessee to the agents abroad, through banking channels. It has been found as a fact that the payment was made from the bank account of the assessee directly as a foreign remittance to the agents abroad, as available from the bank certificates furnished by the assessee. The remittance to the agents was in foreign currency, i.e., in the currency of the respective country of the agent. The remittance, it is note worthy, was made directly to the agents & 960/2017 & & 394/CHD/2019 11 and no deposit was made in their accounts. As such, there was no question of the remittance having either been received in India or being deemed to have been received in India, as correctly held by the ld. CIT(A), to which there is no rebuttal. Then, since the services were rendered outside India, it does not amount to a case of income either accruing or arising in India. So, it only remains to be seen as to whether the ld. CIT(A) has correctly held the income of the non-resident to be not accruing or arising in India as per the provisions of Section 9. The first requirement is that of a business connection in India or any property in India or any asset or source of income in India or the transfer of a capital situated in India. It is evident on record and not disputed that the matter does not concern the income in question to have accrued or arisen, whether directly or indirectly through or from any business connection in India or any property in India or any asset or source of income in India or through the transfer of a capital asset situated in India.

Then, since the payments were not by way of either salary, or dividend, or interest, or royalty or technical services, other provisions of Section 9 do not get attracted. This being so, the remittance in question cannot be taxed in India. The & 960/2017 & & 394/CHD/2019 12 Department, again has not been able to refute this. As a necessary corollary, then, since the income of the non- residents is not exigible to tax in India, the provisions of Section 195 do not get attracted and there was no liability on the assessee to make TDS on the payment made.

Boilers & Driers P Ltd.’ (supra) is, as duly taken note of the ld. CIT(A), clearly distinguishable on facts. That decision, places reliance on the decision in the case of ‘Rajiv Malhotra’, rendered by the A.A.R., and reported at 284 ITR

11.1 Therefore, despite referring to and relying on the provisions of Sections 5 and 9 of the Act, as stated in & 960/2017 & & 394/CHD/2019 13 Ground No.2, the Department has not been able to make out a case as to how the matter at hand gets covered within the provisions of these two Sections. The findings of the ld. CIT(A) on this issue remains un-hinged and firm. These findings are, therefore, confirmed.

The AO held that the provisions of Section 14A would apply even if no exempt income had been earned. Reliance, in this regard had been placed on the Memorandum explaining the provisions of the Finance Bill, 2001, whereby, the provisions of Section 14A had been proposed to be inserted in the Act.

Reliance was also placed on Circular No.14 issued relating to the provisions of the Finance Act, 2001. The assessee’s contention that no borrowed funds had been used for making the investment, was also turned down citing Clause (ii) of Rule 8D. Reference was also made to the Memorandum explaining the provisions of the Finance Bill, 2006. The AO observed that thereby, it had been made mandatory for the AO to determine the amount of expenditure incurred in relation to such income which does not form part of the total & 960/2017 & & 394/CHD/2019 15 income in accordance with such method as may be prescribed by Rule 8D of the Rules.

13.1 It was in accordance with the above that the AO made disallowance of expenditure of Rs.9,39,450/- by applying the provisions of Section 14A of the Act read with Rule 8D of the Rules. Moreover, the Rule of consistency is also applicable. No such addition was made in the earlier years, under the same facts and circumstances. Therefore, the facts and circumstances remaining unchanged, a diametrically opposite view of that taken in the earlier years.

ITA Nos. 1033 & 960/2017 & & 394/CHD/2019 17 the investment was made out of interest free funds available with the assessee. The share capital of the assessee was of Rs.7,31,62,000/-, there were reserves and surplus of Rs.20,51,03,272/-; therefore, there was availability of an amount of Rs.27,82,65,272/- of interest free funds available with the assessee. It also remains undisputed that no borrowings were made for making the investments and, therefore, no expenditure had been incurred to earn any income and no dividend or other exempt incomes were earned for the investment. The stress of the AO has been on the fact that the provisions of Section 14A of the Act are applicable despite no income having been earned. This, as held by the Hon'ble jurisdictional High Court in “Lakhani Marketing Inc” (supra), is not sustainable. Further, since surplus funds were available with the assessee, the reliance by the assessee on the following decisions is found to be well placed, decision of the Hon'ble Punjab & Haryana High Court in the case of “CIT Vs Winsome Textile Inds Ltd.”, 319 ITR 204, wherein also, it was held that the assessee had admittedly not made any claim for exemption and, therefore, Section 14A could have no application. Moreover, as contended on behalf of the assessee and not disputed by the & 960/2017 & & 394/CHD/2019 18 Department, in the assessee's own case for assessment year 2011-12, vide order dated 24.11.2016, the ld. CIT(A) has itself deleted the addition made under Section 14A under similar facts and circumstances.

ITA 960/CHD/2017

1. That the order passed under section 250(6) of the Income Tax Act, 1961 by the Learned Commissioner of Income Tax (Appeals)-I Chandigarh in Appeal No. 262/15-16 dated 02.03.2017 is contrary to law and facts of the case.

2. That in the facts and circumstances of the case, the Ld. Commissioner of Income Tax (Appeals) gravelly erred in upholding the disallowance of interest @ 12% per annum on notional basis on the following advances given by appellant. Narration Advance Advance against land Rs. 73,42,000/- HSIDC, Panchkula Rs.2,92,578/- Zeal Exim Pvt. Ltd. Rs.9,50,000/-

The appellant had sufficient funds of its own, therefore no disallowance is called for.

20.1 Ground No. 1 is general in nature.

Narration Advance Advance against land Rs. 73,42,000/- Application money for HUDA Rs. 6,40,000/- HSIIDC, Panchkula Rs, 2,92,578/- Zeal Exim Pvt. Ltd. Rs. 9,50,000/- Total Rs. 92,24,578/- & 960/2017 & & 394/CHD/2019 20 22.1 The AO disallowed interest on these advances, @ 12%. The AO placed reliance on the decision of the Hon'ble Punjab & Haryana High Court in the case of “M/s Abhishek Industries Ltd.” 286 ITR 1 (P&H). The AO observed that the interest paid by the assessee corresponding to the interest free advances, was to be allowed on a proportionate basis, the advances having not been made for business purposes.

24.1 Concerning the advance of Rs.2,92,578/- made to HSIDC, Panchkula, the ld. CIT(A) observed that the assessee had made interest in an industrial plot taken from HSIDC and the amount of Rs. 2,92,578/- reflected the payment of Stamp Duty, that the plot had been purchased for business purposes but it had not been put to use during the year and the money had been paid out of interest bearing funds, from the assessee's CC Account in the State Bank of Patiala; that thus, interest bearing funds were used for making investment in a capital asset which was not put to use during the year. It was held that the disallowance is called for as per the proviso to Section 36(1)(iii) of the Act. Holding so, the ld. CIT(A) confirmed the disallowance. & 960/2017 & & 394/CHD/2019 22 24.2 Regarding the advance of Rs.9,50,000/- made to “Zeal Exim P.Ltd.” (supra), the ld. CIT(A) observed that again the money had been paid out of interest appearing in SBOP, CC Account of the assessee, for which payment of advance, the assessee had not been able to explain the business expediency. Therefore, the disallowance was confirmed.

24.3 On behalf of the assessee, it has been contended that the share capital and reserves and surplus of the assessee were much more than the investment made; that the assessee had sufficient own funds and, therefore, the presumption is that the interest free advances were given out of the own funds of the assessee, for which, the disallowance made requires to be deleted. Reliance has been placed on “Munjal Sales Corporation Vs CIT” 298 ITR 298 (S.C.), “DCIT, Central Circle-2(1), Bangalore Vs JSR Construction P. Ltd.”

71 Taxman 184, “ACIT Vs Omaxe Bikes Ltd.” 156 ITD 566 (CHD).

ITA-389/CHD/2019& ITA-394/CHD/2019

ITA 389/CHD/2019 has been filed by the Department whereas ITA 394/CHD/2019 has been filed by the assessee.

ITA 389/CHD/2019 (Department’s Appeal)

1. On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in allowing the appeal of the assessee without appreciating the facts of the case.

2. On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in deleting the addition of Rs. 3,33,48,160/- made u/s 40(a)(ia) on account of non-deduction of TDS ignoring the detailed finding of the assessing officer that as per section 5 and section 9 of the Act the income is deemed to accrue or arise in India even if the services by the commission agents have been rendered abroad. Further since the right to receive the commission arises in India, the income of such commission agents is deemed to accrue or arise in India and accordingly tax deduction would be mandatory u/s 195.

6. On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in deleting the addition of Rs. 1,27,752/- made u/s 36(l)(iii) of the I.T.Act, 1961 on account of application money for HUDA and advances made to Zeal Exim (P) Ltd. ignoring that the assessee has failed to establish any business expediency for advancing such a huge sum.

No decision contrary to those relied on by the ld. CIT(A) has been cited before us. Therefore, finding no error therein, the Commissioner’s action of deleting the addition is confirmed while allowing Ground No.3.

Ground Nos. 4,5 and 6

34.1 Regarding the application money paid to HUDA, the ld. CIT(A), for the year under consideration, has deleted the disallowance made by the AO by following the CIT(A)’s order for assessment year 2013-14, where the assessee had & 960/2017 & & 394/CHD/2019 28 contended that the amount had been paid from the assessee's Current Account in HDFC Bank, in January,2012.

The ld. CIT(A) observed that since the funds had been invested from the assessee's Current Account, in which, the assessee's own funds were deposited, it could not be said that borrowed funds were used for making the advance; that no interest was payable by the assessee of this money; and that therefore, the disallowance of interest on this score had not been correctly made by the AO. The ld. CIT(A) deleted the addition.

34.2 While doing so, the ld. CIT(A) found no difference in the facts for both the years, i.e.,, assessment year 2013- 14 and 2014-15.

35.1 By way of Ground No.4, the Department has alleged that the ld. CIT(A) has erred in deleting the addition & 960/2017 & & 394/CHD/2019 29 by observing that the assessee made advances from the Current Account representing the non-interest bearing funds, ignoring that the Current Account is mixed kitty account where interest bearing and interest free funds can be parked for further payment. This position can well be verified and the AO is directed to ascertain the position of availability of the funds of the assessee exceeding the advances as alleged and to grant relief to the assessee in accordance with law.

35.2 So far as regards the advances made to “M/s Zeal Exim P.Ltd.”(supra), the AO made the same disallowance of Rs.9,50,000/-, as for assessment year 2013-14. For assessment year 2012-13, the ld. CIT(A) had confirmed the disallowance. However, the Tribunal, vide order dated 28.11.2017, had deleted the disallowance holding that sufficient interest free funds were available with the assessee. Finding the facts to be similar for assessment year 2014-15, the ld. CIT(A), following the aforesaid Tribunal order for assessment year 2012-13, has deleted the disallowance. & 960/2017 & & 394/CHD/2019 30 35.3 Again, facts on this issue are the same for assessment years 2011-12, 2012-13, 2013-14 and 2014-15.

So, for assessment year 2014-15 also, the AO is directed to ascertain the position of availability of the funds of the assessee exceeding the advances as alleged and to grant relief to the assessee in accordance with law. Ground Nos.

4, 5 and 6 are, therefore, partly accepted. 35.4. In the result, appeal is partly allowed. ITA 394/CHD/2019 (Assessee's appeal)

2. That in the facts and circumstances of the case, the Ld. Commissioner of Income Tax (Appeals) gravelly erred in sustaining the disallowance of Rs. 56,229/- made by the Ld Assessing officer under Section 36(i)(iii) of the Income Tax Act on advance against the land given by the appellant. Although, the appellant had sufficient interest free funds of its own to make such advances. 36.1 Ground No. 1 is general. & 960/2017 & & 394/CHD/2019 31 37. The grievance of the assessee by way of Ground No.

2 is against the action of the ld. CIT(A) in confirming the disallowance of Rs.56,229/- made by the AO under Section 36(1)(iii) of the Act on advance against land given by the assessee. According to ld. Counsel for the assessee, this ought not to have been done since the assessee had sufficient interest free funds of its own to make such advances.

Order pronounced on 04.09.2024.