Income Tax Appellate Tribunal - Lucknow
M/S Northern Tannery, Kanpur vs Assessee on 8 June, 2016
I.T.A. No.220/Lkw/16
1
Assessment year:2011-12
IN THE INCOME TAX APPELLATE TRIBUNAL
LUCKNOW BENCH 'B', LUCKNOW
BEFORE SHRI P. K. BANSAL, ACCOUNTANT MEMBER
AND SHRI ABY T. VARKEY, JUDICIAL MEMBER
ITA No.220/Lkw/2016
Assessment year:2011-12
M/s Northern Tannery, Vs. A.C.I.R.,
150 Ft. Road, Jajmau, Range-1,
Kanpur. Kanpur.
PAN:AAAFN6778L
(Appellant) (Respondent)
Appellant by Shri Ashish Jaiswal, Advocate
Respondent by Smt. Alka Singh, D. R.
Date of hearing 30/05/2016
Date of pronouncement 08/06/2016
ORDER
PER P. K. BANSAL, A.M.
This appeal has been filed by the assessee against the order of CIT(A)-I, Kanpur dated 03/02/2016.
2. Ground No. 1 & 2 relate to the sustenance of export sales commission amounting to Rs.25,07,412/- as the said commission has been paid by the assessee without deduction of tax at source. Both the parties agreed that this issue is duly covered by the decision of this Tribunal in the case of the assessee for the assessment year 2010-11, the copy of which was filed at page Nos. 75 to 87 of the paper book which we have perused and after going through the order of this Tribunal, we noted that the similar issue has arisen in the assessment year 2010-11 where the Tribunal under para 8,9 & 10 has held as under:
I.T.A. No.220/Lkw/16 2 Assessment year:2011-12 "8. Having carefully examined the orders of the lower authorities in the light of the rival submissions, we find that we have been taking a consistent view in series of cases that wherever the payments are made on account of commission for procuring orders for sale, tax was not required to be deducted at source. Reference was made to the provisions of section 9(1)(vii) of the Act and Explanation added to section 9(1)(vii) of the Act by the Finance Act, 2010, but this aspect has already been examined by the jurisdictional High Court in the case of CIT vs. M/s Model Exims (supra). Following the judgment of the Hon'ble jurisdictional High Court in the case of CIT vs. M/s Model Exims (supra), the Tribunal has concluded in the assessee's own case in the immediately preceding year that tax was not required to be deducted at source on commission payment to foreign agents who has rendered services outside India. The commission paid to foreign agents for procuring orders cannot be called either to rendering of technical services or managerial or consultancy services.
These different types of services were examined by the Hon'ble Delhi High Court in the case of Director of Income-tax (International Taxation)-II vs. Panalfa Autoelektrik Ltd. (supra) and their Lordships have held that services rendered for procurement of export orders etc. cannot be treated as managerial services provided by the non-resident to the respondent assessee. Their Lordships further defined the consultancy services and technical services. For the sake of reference, we extract the relevant observation of the Hon'ble High Court of Delhi as under:-
"The expression 'managerial, technical and consultancy services' have not been defined either under the Act or under the General Clauses Act, 1897. The said terms have to be read together with the word 'services' to understand and appreciate their purport and meaning. One has to examine the general or common usage of these words or expressions, how they are interpreted and understood by the persons engaged in business and by the common man who is aware and understands the said terms. [Para 14] The services rendered, the procurement of export orders, etc. cannot be treated as management services provided by the non-resident to the respondent- assessee. The non-resident was not acting as a manager or dealing with administration. It was not controlling the I.T.A. No.220/Lkw/16 3 Assessment year:2011-12 policies or scrutinizing the effectiveness of the policies. It did not perform as a primary executor, any supervisory function whatsoever. This is clear from the facts as recorded by the Commissioner (Appeals), which have been affirmed by the Tribunal. [Para 15] The non-resident, it is clear was appointed as a commission agent for sale of products within the territories specified and subject to and in accordance with the terms set out, which the non-resident accepted. The non-resident, therefore, was acting as an agent for procuring orders and not rendering managerial advice or management services. Further, the respondent-assessee was legally bound with the non-residents' representations and acts, only when there was a written and signed authorization issued by the respondent- assessee in favour of the non-resident. Thus, the respondent- assessee dictated and directed the non- resident.
The Commissioner (Appeals) has also dealt with quantification of the commission and as per agreement, the commission payable was the difference between the price stipulated in the agreement and the consideration that the respondent-assessee received in items of the purchase contract or order, in addition to a predetermined guarantee consideration. Again, an indication contra to the contention that the non-resident was providing management service to the respondent- assessee. [Para 16] The revenue has not placed copy of the agreement to contend that the aforesaid clauses do not represent the true nature of the transaction. The Assessing Officer in his order had not bothered to refer and to examine the relevant clauses, which certainly was not the right way to deal with the issue and question. [Para 17] Further, would be incongruous to hold that the non- resident was providing technical services. The non- resident had not undertaken or performed 'technical services', where special skills or knowledge relating to a technical field were required. Technical field would mean applied sciences or craftsmanship involving special skills or knowledge but not fields such as arts or human sciences. [Para 19] I.T.A. No.220/Lkw/16 4 Assessment year:2011-12 The moot question and issue is whether the non-resident was providing consultancy services. [Para 20] The word 'consultant' refers to a person, who is consulted and who advises or from whom information is sought. In Black's Law Dictionary, Eighth Edition, the word 'consultation' has been defined as an act of asking the advice or opinion of someone (such as a lawyer). It may mean a meeting in which parties consult or confer. For consultation service under Explanation 2, there should be a provision of service by the non-resident, who undertakes to perform it, which the acquirer may use. The service must be rendered in the form of an advice or consultation given by the non-resident to the resident Indian payer. [Para 21] In the present case commission paid for arranging of export sales and recovery of payments cannot be regarded as consultancy service rendered by the non- resident. The non-resident had not rendered any consultation or advice to the respondent-assessee. The non-resident no doubt had acquired skill and expertise in the field of marketing and sale of automobile products, but in the facts, as noticed by the Tribunal and the commissioner (Appeals), the non-resident did not act as a consultant, who advised or rendered any counselling services.
The skill, business acumen and knowledge acquired by the non-resident were for his own benefit and use. The non-resident procured orders on the basis of the said knowledge, information and expertise to secure 'their' commission. It is a case of self-use and benefit, and not giving advice or consultation to the assessee on any field, including how to procure export orders, how to market their products, procure payments etc. The assessee upon receipt of export orders, manufactured the required articles/goods and then the goods produced were exported. There was no element of consultation or advice rendered by the non-resident to the respondent- assessee. [Para 22] The technical services consists of services of technical nature, when special skills or knowledge relating to technical field are required for their provision, managerial services are rendered for performing I.T.A. No.220/Lkw/16 5 Assessment year:2011-12 management functions and consultancy services relate to provision of advice by someone having special qualification that allows him to do so. In the present case, the aforesaid requisites and required necessities are not satisfied. Indeed, technical, managerial and consultancy services may overlap and it would not be proper to view them in watertight compartments, but in the present case this issue or differentiation is again not relevant. [Para 25]"
10. The scope of Explanation 2 to section 9(1)(vii) of the Act by the Finance Act, 2010 was also examined by the jurisdictional High Court in the case of CIT vs. Model Exims (supra) which was followed by the Tribunal in the assessee's own case for the immediately preceding year. The relevant observations of the Tribunal are extracted hereunder for the sake of reference:-
"5. The ld. counsel for the assessee has contended that this issue is covered by the order of the jurisdictional High Court and various orders of the Tribunal, particularly in the case of ACIT vs. M/s Model Exims, Kanpur in I.T.A. No. 697/LKW/2013 in the light of CBDT circular and amendments. We find that the view taken by the Tribunal has been approved by the Hon'ble High Court of Allahabad in the case of CIT vs. M/s Model Exims, 358 ITR 2 (Alld). The relevant observations of the Hon'ble High Court are extracted hereunder:-
"We find that all the questions as framed by the department are covered by our judgment in CIT v. M/s Model Exims, Kanpur, Income Tax Appeal (Def.) No.164 of 2011, decided in favour of the assessee and against the revenue on 10.09.2013 and die judgment in CIT, Kanpur v. M/s Allied Exims, Income Tax Appeal No.313 of 2013 decided on 13.11.2013. In both these judgments we have held, that A.O. did not bring anything on record, which could demonstrate that non-resident agents were appointed as selling agents, designers or technical advisers. The payment of commission to foreign agents did not entitle such foreign agents to pay tax in India and thus the TDS was not liable to be deducted under Section 195 of the Act. The disallowance made by A.O. I.T.A. No.220/Lkw/16 6 Assessment year:2011-12 under Section 40 (a) (i) for non-deduction of tax at source under Section 195 were not justified.
Shri Bharat Ji Agrawal has tried to distinguish the judgments on the ground that in the present case there was sufficient material by way of written submissions of the assessee, who had stated in his reply on 20.12.2010 that the assessee is engaged in business of manufacture and export of finished leather, shoe upper and leather products. The assessee's main business being export business it has to take the service of foreign agents, who secure export orders and help in execution of such business. For the services rendered by the foreign agents, they are paid commission in foreign exchange by remitting the amount through bank.
We find that the CIT (A) has considered the alleged admission in the reply of the assessee and has also perused the agreement from which he found that there was nothing, which could demonstrate that these agents were appointed as selling agents, designers or technical advisers for invoking the provisions of Section 9 (1) (vii) of the Act. The findings recorded by the CIT (A), which have been confirmed by the ITAT is quoted as below:-
"5.3.2 The A. O. has also invoked the provisions of Section 9 (1) (vii) on the premise that such payments also full under FTS. In this regard she has observed that normally the exporter appoints the agents as his selling agent, designer & technical adviser for his products. He has further observed that being commission agent required managerial acumen & expertise and therefore, would be covered under Section 9 (1) (vii) of the Act as managerial services. On perusal of the assessment order and assessment folder, I find that the A.O. has not brought anything on record which could demonstrate that these agents had been appointed as selling agents, designers & technical advisers. Rather on me contrary I find that the agreement is of for procuring orders and nothing else. In absence of any such evidence, this observation of the A.O. is mere conjecture and therefore, no cognizance of the same can be I.T.A. No.220/Lkw/16 7 Assessment year:2011-12 taken. It is a trite law that suspicion, no matter how grave, cannot take place of evidence. In this case, there is even no case of suspicion, leave aside any evidence to the effect that the agents were not only selling agents but also designers and technical advisers. The confirmation from the respective foreign agents that the foreign agents did not have any branch or PE in India further supports the case of the appellant.
5.3.3 The A.O.'s observation that as a selling agent, the agent has to have managerial acumen and, therefore, hit by the provisions of Section 9 (1) (vii), is baseless. The provisions of Section 9 (1) (vii) deals with fees for technical services and it has to be read in that context. Par that matter, everything in life requires managerial skills, like running the household, being an Assessing Officer, running a shop etc. Will that tantamount to providing managerial services in the context of Section 9 (1) (vii)? The answer is clear NO. Thus, the aforesaid payments do not fall within the meaning of "FTS' as described in Section 9 (1) (vii) of the Act.
5.3.4 The income of the non-resident was not chargeable to tax in India since the same was neither received in India nor had it accrued or deemed to accrue in India. Accordingly, the appellant was not required to deduct Tax at Source u/s 195 in respect of commission paid to the Foreign Agents. Disallowance u/s 40 (a) (i) is, therefore, deleted."
Shri Bharat Ji Agrawal submits that the CIT (A) and ITAT have not considered the explanation added to Section 9 (1) (vii) by the Finance Act, 2010 w.e.f. 1.6.1976 and which provides that for the purpose of second proviso the income of such non-resident shall be deemed to accrue or arise in India under Clause (v) or Clause (vi) or Clause (vii) [of sub-section (1)] and shall be included in total income of non-resident whether or not, non- resident has residence or place of business or business I.T.A. No.220/Lkw/16 8 Assessment year:2011-12 commission in India; or non-resident has rendered services in India.
We do not find that the fact situation contemplated or clarified in the explanation added by Finance Act, 2010 is applicable to the present case as in the present case the agents appointed by the assessee had their offices situate in a foreign country and that they did not provide any managerial services to the assessee. Section 9 (1)
(vii) deals with technical services and has to be read in mat context. The agreement of procuring orders would not involve any managerial services. The agreement did not show the applicability or requirement of any technical expertise as functioning as selling agent, designer or any other technical services.
There are no distinguishing feature in this case, nor do we find that the ratio of the Constitution Bench decision in Commissioner of C. Ex., Bolpur v. Ratan Melting & Wire Industries, (2008) (231) E.L.T. 22 (SC) (para 6) is applicable in as much as in the present case there was no decision of the Supreme Court or High Court or any statutory provision, which was contrary to the circular, which was withdrawn on 22.10.2009.
The questions of law are covered by the judgments of this Court cited as above, and are decided in favour of the assessee and a against the department."
We, therefore, following the aforesaid judgment of the jurisdictional High Court, decide the issue in favour of the assessee and confirm the order of the ld. CIT(A) in this regard."
10. Similar view was also taken in other cases of the Tribunal. Nothing has been brought on record by the Revenue in order to demolish the stand taken by the assessee and to establish that non-resident has ever rendered any technical services or consultancy or managerial services. Therefore, we are of the view that since the assessee has simply procured export orders through commission agent for which commission was paid, the assessee was not required to deduct tax at source on the commission paid to the foreign agent. Accordingly we confirm the order of the ld. CIT(A)."
I.T.A. No.220/Lkw/16 9 Assessment year:2011-12
3. Respectfully following the said decision, we delete the disallowance. Thus ground Nos. 1 & 2 stand allowed.
4. Ground No. 3 relates to the disallowance on account of telephone expenses and vehicle maintenance amounting to Rs.1,32,122/-.
5. After hearing the rival submissions and going through the orders of the tax authorities below, we noted that the assessee has incurred a sum of Rs.3,85,537/- on telephone, Rs.1,37,690/- on truck vehicle & maintenance and Rs.7,98,007/- on vehicle maintenance. The Assessing Officer disallowed 10% of these expenses as in his opinion these expenses have been incurred for personal purposes also. The assessee is a partnership form and user of the vehicle for personal purposes has not been denied therefore, we restrict the disallowance to 10% of the vehicle maintenance i.e. Rs.79,800/-. Thus disallowance of Rs.1,32,122/- is reduced to Rs.79,800/-. Accordingly, ground No. 3 is partly allowed.
6. Ground No. 4 & 5 relate to the sustenance of addition out of misc. expenses amounting to Rs.2,00,000/-.
7. After hearing the rival submissions and going through the orders of the tax authorities below, we noted that the Assessing Officer noted that the assessee has incurred a sum of Rs.13,93,200/- under the head misc. expenses while in the earlier year, such expenses were to the tune of Rs.10,18,260/-. The assessee was asked to submit the complete details of the expenses. The Assessing Officer noted that all the expenses are not fully verifiable. The Assessing Officer therefore, disallowed Rs.2,00,000/-. We noted from the details of these expenses available on page No. 71 to 74 of the paper book that the assessee has not given the nature of expenses incurred by the assessee. What the assessee has mentioned is I.T.A. No.220/Lkw/16 10 Assessment year:2011-12 just the bill number and date. In view of this fact, the nature of the expenses whether the expenses have been wholly and exclusively incurred for the purpose of the business or not cannot be verified. Keeping in view this fact, in our opinion, it will meet the ends of justice if the disallowance is restricted to Rs.1,00,000/-. We accordingly, reduce the disallowance to Rs.1 lac. Accordingly, ground No. 4 & 5 are partly allowed.
8. Ground Nos. 6 & 7 relate to the sustenance of disallowance of Rs.1,09,174/- u/s 41(1) of the I.T. Act.
9. After hearing the rival submissions and going through the orders of the tax authorities below, we noted that the facts relating to this addition are that the Assessing Officer noted that there was credit balance in the name of M/s Omega International, Jajmau, Kanpur. The Assessing Officer therefore, issued notice u/s 133(6) to the said party and the party stated that there was no transaction between assessee and M/s Omega International during assessment year 2010-11 and there existed no outstanding balance as on 31/03/2011. The Assessing Officer countered the assessee but the assessee stated that this party was their supplier in the past year but in the financial year 2010-11 there was no transaction and a sum of Rs.1,09,174/- is still outstanding. The Assessing Officer therefore, added the sum of Rs.1,09,174/- in the income of the assessee. When the matter travelled to CIT(A), the assessee submitted that the said party might have written off the amount and therefore, might have stated that the said amount cannot be added in the income of the assessee. We noted that it is a case where the liability has already been remitted and ceased in view of the fact that the assessee himself has stated before the authorities below that the other party might have reversed the liability. In our opinion, the impugned case is duly covered by the decision of Hon'ble Supreme Court in the case of CIT vs. Karam Chand Thapar and Others I.T.A. No.220/Lkw/16 11 Assessment year:2011-12 [1996] 222 ITR 112 (SC) in which Hon'ble Supreme Court stated that since the amount has been received in the course of the business, there is no existing liability to repay the amount, the amount will become as trading receipt. In view of the said decision, we confirm the order of CIT(A). Accordingly, ground No. 6 & 7 stand dismissed.
10. In the result, the appeal of the assessee stands partly allowed.
(Order pronounced in the open court on 08/06/2016) Sd/. Sd/.
( ABY T. VARKEY ) ( P. K. BANSAL ) Judicial Member Accountant Member Dated:08/06 /2016 *Singh Copy of the order forwarded to : 1. The Appellant 2. The Respondent. 3. Concerned CIT 4. The CIT(A) 5. D.R., I.T.A.T., Lucknow Asstt. Registrar