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Assistant Commissioner of Income-tax, Company Circle- IV (3), Chennai v/s M.M. Forgings Ltd.

    IT Appeal No. 2679 (Mds.) of 2014

    Decided On, 19 June 2015

    At, Income Tax Appellate Tribunal Chennai


    For the Appellant: Krishnamurthy, CIT. For the Respondent: Philip George, Advocate.

Judgment Text

Chandra Poojari, Accountant Member

1. 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.

2. The first ground in this appeal is with regard to deleting the restriction of deduction u/s.80-IA to the extent of Rs. 62,26,739/- on windmill power generation.

3. 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 Rs. 25,47,94,827/- and the assessment was completed under section 143(3) of the Act determining tax demand at Rs. 33,55,41,210/- by restricting deduction u/s.80-IA(4) from Rs. 5,28,75,459/- to Rs. 4,63,48,720/- and disallowance of Rs. 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 80-IA(5), the profits and gains of eligible business to which the provisions of sub-section (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 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 windmill 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 80-IA.

3.2 Further, the Assessing Officer observed that since allowability of deduction u/s 80-1A(4) is governed by the provisions of Sec 80-1A(5). The deduction u/s 80-IA 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 Asstt. CIT v. Gold Mine & Shares & Finance (P.) Ltd. [2008] 113 ITD 209 as well as the ITAT, Hyderabad in the case of Hyderabad Chemicals Supplies Ltd. v. Asstt. CIT [2012] 20 taxmann.com 289 support of her contention and as such the deduction u/s 80-IA 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 Rs. 5,28,75,459/- as returned by the assessee and restricted to Rs. 4,63,48,720/-. Aggrieved, the assessee preferred an appeal before the Commissioner of Income Tax (Appeals).

4. 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. v. Asstt. CIT [2012] 340 ITR 477/21 taxmann.com 95 (Mad.) wherein held observed that

". . . . . . . . . . . . . .From a reading of Se. 80-IA(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 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.

5. 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. (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.

6. The next ground is with regard to deleting the disallowance of Rs. 7,42,19,641/- made u/s.40(a)(i) r.w.s 195 of the Income-tax Act.

7. The fact of the issue are that that the assessee has incurred foreign agency commission of Rs. 4,47,37,475/- and warehousing and other charges incurred overseas of Rs. 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 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 Rs. 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 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, at 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 Supreme Court in the case of Transmission Corpn. of AP Ltd. v. CIT [1999] 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 Rs. 7,42,19,641/-Aggrieved, the assessee preferred an appeal.

8. 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 business activities outside India

* The commission paid rebate 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.

9. He relied on the judgment of Supreme Court in the case of GE India Technology Centre (P.) Ltd. v. CIT [2010] 327 ITR 456/193 Taxman 234/7 taxmann.com 18 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 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.

10. 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

11. 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.

12. The Commissioner of Income Tax (Appeals) further observed that the 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 judgment of the Supreme Court in the case of GE India Technology Centre (P.) Ltd. (supra ) 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.

13. 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 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 Asstt. CIT v. Vilas N. Tamhankar [2015] 68 SOT 124/55 taxmann.com 413 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 v. Faizan Shoes (P.) Ltd. [2014] 367 ITR 155/226 Taxman 115/48 taxmann.com 48 (Mad.) and further in the case of Brakes India Ltd. v. Dy. CIT (LTU) [2013] 144 ITD 403/33 taxmann.com 501 (Chennai - Trib.) the co-ordinate Bench of the Tribunal, it was held that

'47. 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 re

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cipients had not made available to the assessee any new technique 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 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 bona fide 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. 15. In the result, the appeal of the Revenue in ITA No.2679/Mds/2014 is dismissed.