Income Tax Appellate Tribunal - Lucknow
Reliance Exports, Kanpur vs Department Of Income Tax
IN THE INCOME TAX APPELLATE TRIBUNAL
LUCKNOW BENCH "B", LUCKNOW
BEFORE SHRI SUNIL KUMAR YADAV, JUDICIAL MEMBER AND
SHRI J SUDHAKAR REDDY, ACCOUNTANT MEMBER
ITA No.347/LKW/2011
Assessment Year:2008-09
M/s Reliance International v. ITO 3(3)
105/336 A, Chamanganj, Kanpur
Kanpur
PAN:AADFR6987J
(Appellant) (Respondent)
ITA No.434/LKW/2011
Assessment Year:2008-09
ITO 3(3) v. M/s Reliance International
Kanpur 105/336 A, Chamanganj,
Kanpur
PAN:AADFR6987J
(Appellant) (Respondent)
ITA No.348/LKW/2011
Assessment Year:2008-09
M/s Reliance Exports v. ITO 3(3)
99/263, Nala Road Kanpur
Kanpur
PAN: AADFR6496C
(Appellant) (Respondent)
ITA No.433/LKW/2011
Assessment Year:2008-09
ITO 3(3) v. M/s Reliance Exports
Kanpur 99/263, Nala Road
Kanpur
PAN: AADFR6496C
(Appellant) (Respondent)
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Assessee by: Shri. Rakesh Garg, Advocate
Department by: Smt. Ranu Biswas, D.R.
Date of hearing: 15.03.13
Date of pronouncement: 28/05/2013
ORDER
PER SUNIL KUMAR YADAV:
These cross-appeals are preferred by the Revenue as well as the assessees against respective order of the ld. CIT(A) pertaining to assessment year 2008-09 on common grounds. Since these appeals were heard together, these are being disposed of through this consolidated order.
2. In these appeals mainly two issues are involved - one is with regard to the disallowance of payment of commission to foreign agent on account of non-deduction of TDS and the other is with regard to the disallowance of payment on partners‟ insurance premium.
3. The facts in brief culled out from the orders of the lower authorities are that the Assessing Officer has made disallowance of payment of commission made to foreign agent and payment of insurance premium of partners‟ insurance, against which appeals were filed before the ld. CIT(A) and the ld. CIT(A) accepted the contentions of the assessee that deduction of TDS on payment of commission to foreign agent is not required as the foreign agents are not liable to pay taxes and accordingly allowed the claim, but with regard to the payment of partners‟ insurance premium, the ld. CIT(A) has rejected the claim of the assessee and confirmed the disallowance.
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4. Against respective grievances, the assessees as well as the Revenue have preferred appeals before the Tribunal.
5. Through appeals in ITA Nos.433 & 434/LKW/2011, the Revenue has assailed the orders of the ld. CIT(A) on various grounds, but they all relate to the deletion of addition made on account of non-deduction of TDS on payment of commission to foreign agent without appreciating the facts brought on record by the Assessing Officer during the course of assessment proceedings.
6. The ld. D.R., besides placing heavy reliance upon the orders of the Assessing Officer, has contended that earlier circular issued by the Board vide Circular No.23 of 1969 dated 23.7.1969 was withdrawn by the Board vide Circular No. 07 of 2009 dated 22.10.2009 with immediate effect. Once the Circular, on the basis of which the assessees have raised this claim, has been withdrawn by the Board by subsequent Circulars, no benefit based on those Circulars can be given to the assessees. Therefore, the Assessing Officer has rightly disallowed the claim of payment of commission to foreign agent for non-deduction of TDS.
7. The ld. counsel for the assessee, Shri. Rakesh Garg, Advocate has strongly contended that the assessee is an 100% export oriented unit, exporting leather saddler and its accessories abroad, procure and execute orders by direct visit to foreign counties and through agents also, whom they pay commission for services rendered outside India in connection with the business of the assessee. The commission has been paid to Shri. Peter Koch of Germany. The residential status of the foreign agent was non- resident individual (foreign national). Since the payment was made outside India to foreign agent for the services rendered outside India, the assessee was not required to deduct TDS on the payment of commission. Therefore, disallowance made by the Assessing Officer was bad in law. It was further :-4-:
contended that at the relevant point of time in view of C.B.D.T. Circular No.23 of 1969 dated 23.7.1969 and Circular No.786 dated 7.2.2000, the assessee was not required to deduct tax at source under section 195 of the Act and the Circular No.7 of 2009 dated 22.10.2009 withdrawing the earlier Circular No.23 of 1969 dated 23.7.1969 and Circular No.786 dated 7.2.2000 will be operative only from 22.10.2009 and not prior to that date. Since the assessment year involved in these appeals is 2008-09, therefore, Circular No.7 of 2009 cannot be operative and the claim of the assessee is to be adjudicated in the light of the old Circulars. Besides, he has placed reliance upon the following judgments:-
1. The DCIT vs. Shri. Sanjiv Gupta, ITA No. 587/LKW/2010, Order dated 7.1.2011.
2. CIT vs. Eon Technology (P) Ltd. [2012] 246 CTR 40 (Del).
3. ACIT-I vs. M/s Model Exima, ITA No. 754/LKW/2010, order dated 28.4.2011.
4. CIT vs. Geeva Films [1983] 141 ITR 632 (Ker.).
5. CIT vs. Edward (B.M.), India Sea Foods [1979] 119 ITR 334 (Ker.) (FB).
8. Having heard the rival submissions and from a careful perusal of the orders of the lower authorities and the judgments referred to by the parties, we find that undisputedly the assessee is an 100% export oriented unit and execute its orders by direct visit to foreign countries and through agent also whom they paid the commission for the services rendered outside India in connection with their business. The assessee has made payment of commission to foreign agent outside India for the services rendered outside India for the assessee.The Revenue has raised a dispute that :-5-:
payment of commission cannot be allowed without deducting TDS, having relied upon the Circular No.7 of 2009 whereby earlier Circular No.23 of 1969 dated 23.7.1969 and Circular No.786 dated 7.2.2000 were withdrawn. Our attention was invited to the fact that payments were made during the financial year 2007-08 and at the relevant point of time old Circular No.23 of 1969 dated 23.7.1969 and Circular No.786 dated 7.2.2000 were very much in force and Circular No.7 of 2009 was not issued. Therefore, the assessee was justified in non-deduction of tax on payment of commission to foreign agent following the old Circular No.23 of 1969 dated 23.7.1969 and Circular No.786 dated 7.2.2000. This aspect was repeatedly examined by the Tribunal and various High Courts in aforesaid cases referred to by the ld. counsel for the assessee. The ld. CIT(A) has adjudicated the issue following the order of the Tribunal in the case of DCIT vs. Shri. Sanjiv Gupta (supra). For the sake of reference, the relevant observations of the ld. CIT(A) are extracted hereunder:-
"This Issue has been dealt at length by the Hon'ble ITAT (Lucknow) in the case of DCIT V/s. Shri Rajeev Gupta [ITA NO.587/LKW/2010, dated 07/01/2011] as under:
In the instant case, the assessment year involved is 2007- 08 and the relevant previous year is 2006-07. Admittedly, return of income was filed on 30.10.2007. At the time of filing of the return, circular No.7 of 2009 dated 22.10.2009 was not in force by which the CBDT withdrew circular no.23 dated 23.7.1969 with immediate effect. In our considered view, where a circular issued earlier created a vested right in the tax-payer and such right is sought to be curtailed or withdrawn by a subsequent :-6-:
circular, then such subsequent circular will not have a retrospective effect While taking such a view, we are fortified by the decision of the Hon'ble Bombay High Court in the case of BASF (India) Ltd. and another vs. W. Hasan, CIT, (2006) 280 ITR 136 (Bom.) wherein it has been held that circulars which are in force during the relevant assessment years are the circulars that have to be applied and subsequent circulars either withdrawing or modifying the earlier circulars have no application. Similar view has been taken in CIT vs. Geeva Films, (1983) 141 ITR 632(Ker.) and CIT vs. B.M. Edward India Sea Foods, (1979), 119 ITR 334 (Ker.)(F.B.).
In the case of M/s. Siemens Aktiengesellschaft (supra), while deciding a similar issue, the Tribunal held that it is axiomatic that a circular in operation through the relevant assessment year cannot be held to be in operational simply by reason of the fact that it has been withdrawn in the year 2009. The withdrawal of such circulars will be effective only after the said date of 22nd October 2009 by which these circulars have been withdrawn 'with immediate effect'. Accordingly, the Mumbai Bench of the Tribunal held that issuance of circular no. 7 of 2009 withdrawing the circular no.23 of 1969, 163 of 1975 and 786 of 2000 will be operative only from 22.10.2009 and not prior to that date. Thus, the withdrawal of earlier circulars with effect from 22.10.2009 has no bearing in the instant case. In our view, the above said decision is squarely applicable to the facts of the present case. It is worth mentioning that the previous year involved in 2006- 07 relevant to the assessment year under consideration. At the relevant time, in view of the C.B.D.T. circular No.23 dated 23.7.1969 :-7-:
and circular no.786 dated 7.2.2000, the assessee was not obliged to deduct the tax under Section 195 of the Act and the circular No.7 of 2009 dated 22.10.2009 withdrawing the circular No.23 of 1969 and circular No.786 of 2000 will be operative only from 22 nd October, 2009 and not prior to that date. We may also mention that the decision relied upon by the AO in the case of Van Oord ACZ India (P.) Ltd. vs. Addl.CIT (supra) has been overruled by the Hon'ble Delhi High Court which is reported in (2010) 230 CTR (Del.) 365, wherein the Hon'ble High Court has concluded as under:
"Obligation to deduct tax at source under s. 195 is attracted only when the payment is chargeable to tax in India: IT authorities having accepted: that the non-resident recipient is not liable to pay any tax in India, the assessee-payer was not liable to deduct tax at source under s. 195(1) in respect of the mobilization and demobilization costs reimbursed by it to the said non-resident company."
In view of the above discussion, we do not find any infirmity in the order of the Id. CIT(A) on this issue and accordingly we uphold the same."
5.2.2 The A.O has also observed in the assessment order that such services could also be made taxable U/s. 9(1)(vii) of the Act as "Fees for Technical Services". However, there is nothing on record or in the assessment order which could lead to the conclusion that the non- resident was rendering any such services which could be treated as Technical/Consultancy or Managerial Services. On perusal of the correspondence between the appellant and the foreign agents, I find that there was no element of Technical/Consultancy or Managerial Services in the services rendered by the nonresident agent. The :-8-:
services rendered by the non-resident agent were simply to procure orders from foreign buyers and to receive commission. Under the circumstances, the provision of section 9(1)(vii) are not applicable to the facts of the instant case.
5.3 In view of the aforesaid discussion, the appellant was not required to deduct tax u/s.195 in respect of commission paid to the foreign agents. Disallowance made u/s.40(a)(i) is, therefore, deleted."
9. Though the Revenue has argued before us that the payments to the non-residents were made in India, as it is recorded in the books of account maintained in India, but no evidence is placed in this regard.
10. In the case of CIT vs. Eon Technology (P) Ltd. (supra), their Lordships have held that when non-resident agents operates outside country and no part of his income arises in India and since the payment remitted directly abroad and merely because entry in the books of account is made, it does not mean that non-resident has received any payment in India. Thus keeping in view the totality of the facts and circumstances of the case, we are of the considered opinion that payment of commission to non-resident was made outside India for the services rendered outside India and merely an entry in the books of account is made in India, for which it cannot be held that non-resident has received any payment in India. We are, therefore, of the view that the assessee was not required to deduct tax at source on the payment of commission to non-resident. We, therefore, find ourselves in agreement with the order of the ld. CIT(A) on this issue and confirm the same.
11. Through ITA Nos.347 & 348/LKW/2011, the assessees have assailed the orders of the ld. CIT(A) that the ld. CIT(A) has erred in :-9-:
confirming the disallowance of partners‟ insurance premium debited to the profit and loss account.
12. The facts in brief culled out from the orders of the lower authorities are that the premium for the life insurance policies purchased in the name of partners were disallowed by the Assessing Officer though it was emphatically argued before him that the policies have been taken in the status of keyman policy and the policies are quite old and premium has been paid year-after-year which has been allowed by the Assessing Officer himself while completing the assessment for earlier years. The Assessing Officer has disallowed the claim of payment of premium on the insurance policies purchased in the name of partners following the Circular issued by IRDA on 30.1.2006. While doing so the Assessing Officer has relied upon the judgment of Hon'ble Gujarat High Court in the case of CIT vs. Khodidas Motiram Panchal [1986] 161 ITR 99 (Guj.).
13. Aggrieved, the assessees preferred appeals before the ld. CIT(A), but did not find favour with him.
14. Now the assessees have preferred appeals before the Tribunal with the submission that these policies were purchased in the name of the partners and life insurance premium has been paid by the firm for the last so many years and every year it was allowed. The ld. counsel for the assessee has invited our attention to the Insurance Policies and Receipts of premium in support of his contention that the Insurance Policies were purchased in the name of the partners and the firm remains the proposer therein and on its maturity, the assured sum is payable to the firm, not to the partners. In the policies the partners were shown as assured person only. Therefore, these policies were purchased to protect the interest of the firm in case of sudden demise of the partners. He has also placed reliance upon various premium receipts in which against the partner, letter :-10-:
„A‟ and against the firm letter „P‟ are mentioned, which denote the „Assured person‟ and „Proposer‟. So everywhere the firm i.e. assessee has been mentioned as Proposer and according to the terms of the policy the sum assured is payable only to the Proposer, not to the Assured person. Therefore, the policies were purchased with the same motive and object for which the concept of Keyman policy was introduced through section 10 (10D) of the Act which was later on amended through Finance Act, 2003 w.e.f. 1.4.2004. As per provisions of section 10(10D) of the Act, the sum so received on maturity of Keyman Insurance Policy, shall form part of the total income of the assessee and is taxable. The Kayman Insurance Policy has been defined through Explanation is that "Keyman insurance policy"
means a life insurance policy taken by a person on the life of another person who is or was the employee of the first-mentioned person or is or was connected in any manner whatsoever with the business of the first- mentioned person. Therefore, the Keyman policy was purchased by the business concern for its important employees to protect the interest of the business which may suffer on account of sudden demise of the said employee or the important person. Similar was the object while purchasing these policies in question in the name of the partners of the firm. Undisputedly the partners are the main constituents and important for the business of the assessee-company. Simply the words "Keyman Insurance Policy" is not mentioned in the policy, the object of the policy cannot be changed. Therefore, the payment made by the assessee for the premiums of the insurance policies is an allowable expenditure. The ld. counsel for the assessee has placed reliance upon the judgment of Hon'ble Bombay High Court in the case of CIT vs. B.N. Exports, 231 CTR 227, in which their Lordships have held that Keyman insurance policy is not confined to a situation where there is a contract on employment. The premium on the :-11-:
policy of the partner of the employee is incurred wholly and exclusively for the purpose of business and is allowable as business expenditure.
15. The ld. D.R., on the other hand, has refuted the contention of the ld. counsel for the assessee with the submission that as per definition of Keyman policy, its concept can only be applied when the policy is purchased in favour of the employee of the firm or a Company. The partner of the firm cannot be called to be its employee. Moreover, there is no narration in the policy that the policies are Keyman Policies. These are general policies which can be assigned in favour of any one. Besides, he has strongly placed reliance upon the orders of the ld. CIT(A).
16. Having given a thoughtful consideration to the rival submissions and from a careful perusal of the orders of the lower authorities and documents placed on record, we find that the assessee is a partnership firm and the policies were purchased in the name of the partners. Copies of the policies and the premium receipts are placed on record and from its perusal it is obvious that the assessee-firm is Proposer therein and the partners are shown to be the Assured persons. As against the name of partner the letter „A‟ is mentioned and against the name of the firm the letter "P" is mentioned. In the column relating to payment of sum assured, it has been stated that the sum assured is payable to the proposer or assigns or nominee under section 39 of the Insurance Act. Meaning thereby, the sum assured would be payable only to the assessee and not to the assured person. Similar is the position in the case of Keyman policies purchased by a person. As per definition of Kayman Insurance Policies given through Explanation, the "Keyman insurance policy" means a life insurance policy taken by a person on the life of another person who is or was the employee of the first-mentioned person or is or was connected in any manner whatsoever with the business of the first-mentioned person. The :-12-:
Legislatures have not restricted the scope of persons for whom Kayman insurance policy can be purchased. It can be purchased for the person who in any manner connected with the business of the assessee-purchaser of the Keyman policy. The object of introduction of Keyman policy has been examined at different point of time by various judicial authorities. The Keyman insurance policy is one which is intended to insure against the loss of Keyman in business due to his death or retirement. Life Insurance Corporation of India was the first insurer for such policies. Policies issued presently by other insurers are also similar in every respect. The policy covers an employee or a Director, who is perceived to have significant effect on the profitability of the business. Certain qualifications are prescribed for recognition of Keyman. The eligibility for the maximum sum assured is also subject to the ceiling with reference to the average gross/net profit of the preceding three years and annual remuneration of keyman. Medical fitness of key employees is one of the requirements of the policy. Apart from the elaborate eligibility norms, the annual premium is linked with companies‟ profits indicating that it is primarily intended to the employers of keyman and in the case of partnership insurance to the firm, while the life, that is insured is that of keyman, because the company/firm has an insurable interest on such life.
17. The Hon'ble Gujarat High Court in the case of CIT vs. Khodidas Motiram Panchal (supra) has taken altogether a different stand and has held that life insurance premia paid by the assessee-firm on the policies of the partners is not deductible under section 37(1) of the Act as the amount paid by way of insurance premium is for security of liquid cash in the event of death of one of the partners, for buying shares of deceased partners. The judgments was rendered in 1985 by the Hon'ble Gujarat High Court, but later on this issue came up before the Hon'ble High Court of Bombay in the case of CIT vs. B.N. Exports (supra). Their Lordships of Hon'ble :-13-:
Bombay High Court have examined this issue in detail and has held that the Keyman Insurance Policy is not confined to a situation where there is a contract of employment. The premium on Keyman policy is incurred wholly and exclusively for the purposes of business and is allowable as business expenditure. The relevant observations of the Hon'ble High Court is extracted hereunder:-
"For the purpose of section 10(10D), a keyman insurance policy means a life insurance policy taken by a person on the life of another person who is or was in employment as well as on a person who is or was connected in any manner whatsoever with the business of the subscriber. The words "is or was connected in any manner whatsoever with the business" of the subscriber are wider than what would be subsumed under a contract or employment. The latter part makes it clear that a keyman insurance policy for the purposes of cl. (10D) is not confined to a situation where there is a contract of employment. Circular No. 762, dt. 18th Feb., 1998 issued by the CBDT clarifies the position by stipulating that the premium paid for a keyman insurance policy is allowable as business expenditure. There is a finding of fact by the Tribunal that the firm had not taken insurance for the personal benefit of the partner, but for the benefit of the firm, in order to protect itself against the set back that may be caused on account of the death of a partner. The object and purpose of a keyman insurance policy is to protect the business against a financial setback which may occur, as a result of a premature death, to the business or professional organization. There is no rational basis to confine the allowability of the expenditure incurred on the premium paid towards such a policy only to a situation where the policy is in respect of the life of an employee. A keyman insurance policy is obtained on the life of a partner to safeguard the firm against a :-14-:
disruption of the business that may result due to the premature death of a partner. Therefore, the expenditure which is laid out for the payment of premium on such a policy is incurred wholly and exclusively for the purposes of business. Hence, the appeal by the Revenue does not raise any substantial question of law."
18. As per provisions of section 10(10D) of the Act, the sum assured, received either by the employer or employee, form part of total income and assessed to tax in the hands of the recipient. Since the assured sum received is chargeable to tax at the time of its receipt, the payment of premium is revenue expenditure and is allowable under section 37(1) of the Act. Similar was the position in the instant case that life insurance policies were purchased in the names of the partners by the assessee-firm and at the time of maturity, the sum assured is to be payable to the Proposer i.e. assessee-firm. Therefore, it should be taxable at the time of receipt of the sum assured. Undisputedly there is no mention of the Keyman Policy on the Policy Certificate, but the benefits of the insurance policies are almost same. In case of Keyman policy, the terms and conditions are quite clear that on maturity of the policy the sum assured is taxable in the hands of the recipient. But in the instant case it is not clear from the impugned policy whether these terms and conditions are envisaged while issuing the policy in the name of the partners. But the object of purchase of policy is the same. We are, therefore, of the view that the premium paid on the insurance policies on the partners is allowable as expenditure under section 37(1) of the Act, but in order to give these policies the colour of Keyman, the assessee is required to give an undertaking to the Life Insurance Corporation of India that at the time of receipt of sum assured, the same would form part of the total income of the assessee and no benefit of exemption under section 10(10D) of the Act would be available to the assessee. With these conditions, the claim of the assessee is allowable.
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Accordingly, we direct the Revenue to allow the claim of the assessee subject to undertaking to be furnished by the assessee with Life Insurance Corporation of India.
19. In the result, the appeals of the assessee are allowed and that of the Revenue are dismissed.
Order pronounced in the open court on 28/05/2013
Sd/. Sd/.
[J SUDHAKAR REDDY] [SUNIL KUMAR YADAV]
ACCOUNTANT MEMBER JUDICIAL MEMBER
DATED:28/05/2013
JJ:1804
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT(A)
4. CIT
5. DR
Assistant Registrar