Income Tax Appellate Tribunal - Hyderabad
Avon Organics Ltd.,, Hyderabad vs Department Of Income Tax on 27 August, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD " A " BENCH, HYDERABAD
BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND
SHRI SAKTIJIT DEY, JUDICIAL MEMBER
ITA No.218 & 223/Hyd/2009
Assessment Years: 2005-06 & 2004-05.
ACIT, Cir-8(1),
Hyderabad. .... Appellant
vs.
M/s Avon Organics Ltd.,
Hyderabad. ...Respondent
PAN:AABCA 7422 Q
ITA No.1427/Hyd/2010
Assessment Year: 2006-07
M/s Avon Organics Ltd.,
Hyderabad. ...Appellant
PAN:AABCA 7422 Q
JCIT, Range-8,
Hyderabad. ...Respondent
Assessee by : Shri K.A. Sai Prasad
Department by : Smt. Nivedita Biswas
Date of hearing : 27-08-2012
Date of Pronouncement : 26-10-2012
ORDER
PER SAKTIJIT DEY, J.M.:
These three appeals, two by the department and one by the assessee are directed against separate orders of CIT (A)-III, Hyderabad and they pertain to the assessment years 2005-06, 2004-05 and 2006-07 respectively. Since common issues are involved in these appeals, these are 2 ITA Nos.218 and others of 2009 Avon Organics Ltd., Hyd.
clubbed together and disposed of by this combined order for the sake of convenience.
ITA No. 218/Hyd/2009- Asst. Year : 2005-06:-2. The only effective ground of the department is ground No.2 which is extracted as under:
"The ld. CIT (A) erred in holding that no disallowance u/s 40(a)(i) is called for on commission paid to foreign agents, though no TDS was made by the assessee on such commission payment."
3. Briefly the facts are the assessee carries on activity of manufacture and sale of chemicals and bulk drugs. The assessee filed its return for the assessment year under consideration declaring total loss of Rs.1,42,63,470/-. In course of assessment proceedings, the AO noticed that the assessee has claimed expenditure of Rs.16,81,130/- towards payment of commission to foreign agents but no tax has been deducted at source. The AO asked the assessee to explain as to why commission payment will not be disallowed u/s 40 (a) (i) since no tax has been deducted at source on the payment made. The assessee in its reply explained that export commission was paid to foreign agents for the services rendered by them in connection with effectuating exports sales and the payments are made directly to the bank account of the agent 3 ITA Nos.218 and others of 2009 Avon Organics Ltd., Hyd.
through telegraphic transfer. The assessee relying upon a circular No.786 of CBDT dated 7-2-2000 stated that as the foreign agents operate in their respective countries and no part of the income arises in India, tax is not required to be deducted at source on the payments made to the foreign agents. The AO rejected the contention of the assessee by observing that non residents were paid by way of telegraphic transfer obtained from banks at Hyderabad and therefore the banks acted as agents of non-resident and received the payment on their behalf in India. On the aforesaid conclusion, the AO held that the commission paid is deemed to have received in India. The AO further held that remittance towards commission to a Bank in India coupled with the fact that the credits towards commission was made in the books of accounts of the assessee maintained in India will make the commission liable to tax in India as per section 5(2A) of the Act. The AO also relied on the decision of Supreme Court in the case of Transmission Corporation of AP Limited (239 ITR 587) and Standard Triumph Company Ltd. Vs. CIT (201 ITR 391) and also the decision of the ITAT in the case of Cheminar Drugs Limited vs.ITO in ITA Nos. 10 and 11 of 1996 dated 22-12-99. The assessee challenged the disallowances by filing an appeal before the CIT (A). In course of hearing before the CIT (A), the assessee apart from reiterating his stand taken before the AO also relied upon a decision of ITAT, Hyderabad in the 4 ITA Nos.218 and others of 2009 Avon Organics Ltd., Hyd.
case of Dr. Reddy Laboratories vs. JCIT ITA No.690/Hyd/10 dated 24-8-2007. The CIT (A) following the decision of ITAT, Hyderabad Bench in the case of Dr. Reddy Laboratories Limited (supra) held that commission payment to the foreign agents operating outside India is not liable to tax in India. Therefore, no disallowance could be made u/s 40 (a)(i) of the Act. He therefore deleted the addition.
4. The learned DR relying upon the assessment order submitted that the commission payment being for the services rendered by the foreign agents in connection with business activities arising in India, the income becomes taxable at the hands of the foreign agents and therefore the assessee was required to deduct tax at source. Since the assessee has failed to deduct tax, disallowance u/s 40(a)(i) was in accordance with law.
5. The learned AR strongly supporting the order of the CIT (A) submitted that the disallowance u/s 40(a)(1) was justified since payment of commission should be deemed to have arisen in India as per section 5(2)(a) of the Act. It is further submitted that the foreign agents did not render any part of the services in India. They did not have an establishment in India. Therefore, payment of commission to them not being chargeable to tax in India there is no requirement for deduction of tax u/s 195(1) of the Act. The learned AR further submitted that only because the commission 5 ITA Nos.218 and others of 2009 Avon Organics Ltd., Hyd.
amount was transmitted to foreign agents through telegraphic transfer, it cannot be said that the banks acted as agent on behalf of the foreign agents and received payment on their behalf in India. In support of his contention, the learned AR relied upon a decision of ITAT, Mumbai Bench in the case of Armayesh Global vs. ACIT (2011) 45 SOT 69 (Mum) and a decision of ITAT, Hyderabad Bench in the case of DCIT vs. Divis Laboratories Limited reported in (2011) 131 ITD 271.
6. We have heard rival submissions and perused the material on record. As revealed from the assessment order, the AO has come to the conclusion that the commission payments were deemed to have been received in India only because the telegraphic transfer of the remittances towards commission was made from a bank in India. Apart from these things, the AO has got no other material on record to show that the foreign agents either rendered any services in India or have any permanent establishment in India. Only because the remittances towards commission were telegraphically transferred to the foreign agents from the banks in Hyderabad will not lead to the inference that the income to the foreign agents accrued or arose in India in terms of section 5(2A) of the Act. The ITAT, Hyderabad Bench in the case of Dr. Reddy's Laboratories (supra) took note of the decision of the Hon'ble Supreme Court in 6 ITA Nos.218 and others of 2009 Avon Organics Ltd., Hyd.
the case of Transmission Corporation of A.P (supra) and held in the following manner:-
" In the case of Transmission Corporation (supra), the facts were that the assessee had entered into certain agreements with certain foreign parties for supply of equipments. Another set of contracts entered into were for assembling, erection, testing and commissioning of the equipment. Pursuant to these contracts, payments were made by the assessee to the foreign parties without deducting tax under s.
195 of the Act. The contention of the assessee was
that s. 195 would be applicable only where the
payment to the non resident is wholly income
chargeable to tax as it provides that any person
responsible for paying to a non resident 'any sum chargeable under the provisions of this Act', shall, at the time of payment, deduct income tax thereon at the rates in force. In other words, the contention was that when the payments made to the non resident were not entirely income, but a trading receipt, there is no question of deduction of income tax at the source as the section does not provide for it. To this contention, the Supreme Court answered that the assessee who made the payments to the non residents was under an obligation to deduct tax at source u/s 195 of the Act in respect of the sums paid to them under the contracts entered into. It further held that the obligation of the assessee to deduct tax u/s 195 is limited only to the appropriate proportion of income chargeable under the Act. Thus, it can be seen that the said judgment in fact helps the assessee. The second question answered by the Supreme Court can 7 ITA Nos.218 and others of 2009 Avon Organics Ltd., Hyd.
be understood to mean that the obligation of the assessee to deduct tax u/s 195 is not there when the payment made to the non resident does not contain any proportion of income therein. In our view, right from the beginning, not only on the basis of the circulars of the Board, but also on the basis of the decision of the Tribunal in its own case, the assessee firmly believed that no part of the income paid to the foreign agent was taxable in India. Therefore, there was no question of deducting any tax at source on any proportion of the payment made to the non-residents. Thus, the judgment in the case of Transmission Corporation (supra) does not advance the case of the department in the present appeal. Finally, it may be pertinent to note that Circular No.786 dated 7-2-2000 i.e., the same has been issued after the judgment was rendered in the case of Transmission Corporation (supra) i.e., on 17- 8-1999. The facts in the assessee's case remain governed by the Board Circular and hence, in the final analysis, respectfully following the earlier order of the Tribunal in the assessee's own case, we uphold the order of the CIT (A) deleting the disallowance."
7. In case of DCIT vs. Divis Laboratories Limited (131 ITD
271), the ITAT, Hyderabad Bench while interpreting the provisions contained under s. 195 held that unless the income is liable to tax in India, there is no obligation to deduct tax. In order to determine whether the income can be deemed to accrue or arise in India, it has to be consistent in the context of section 9. As per section 9, the basic criteria provided in the section is about accrual of or arising of income In India by virtue of connection with the property in India or control or management vested in India. Unless these conditions were satisfied, it cannot be held that income has accrued or arisen in India.
8ITA Nos.218 and others of 2009 Avon Organics Ltd., Hyd.
This Tribunal further held that section195 has to be read along with charging sections 4,5 and 9 of the Act. The provisions contained u/s 195 were not meant that the moment there is a remittance, the obligation to deduct TDS automatically arise. Considering the fact that the AO has not brought any material on record to show that the foreign agents have rendered any part of the services in India or have a permanent establishment and business connection in India, it cannot be said that any part of the commission payment made to them accrued or arisen in India requiring deduction of tax u/s 195(1) of the Act. We are also fortified by the decision of the ITAT Bombay Bench discussed above. In the aforesaid view of the matter, we fully agree with the finding of the CIT (A) that no disallowance u/s 40(a)(i) could be made. We therefore uphold the order of the CIT (A) and dismiss the ground raised by the department.
7.1. In the result, department's appeal is dismissed.
ITA No.223/Hyd/09 (Asstt. Year 2004-05):-8. The Revenue has raised six grounds before us. Ground Nos. 1 and 6 are general in nature and hence they do not require any adjudication.
9. Ground No.2 reads as under:-
"The ld. CIT (A) erred in holding that the interest receipt should be set off against such interest payments, having direct nexus with the interest receipts, before excluding 90% thereof 9 ITA Nos.218 and others of 2009 Avon Organics Ltd., Hyd.
in terms of clause (baa) of Explanation to section 80HHC of the IT Act, 1961."
10. Briefly the facts are in the course of assessment proceedings while computing the deduction/s 80HHC of the Act, the AO noticed that the assessee has not reduced its gross interest income by 90% from the profit of the business as required under clause (bba) of explanation to section 80HHC of the Act when the AO raise a query in this regard, the assessee stated that interest income of Rs.31,78,211 and misc. expenses of Rs.7,63,480 was incurred for set off against the interest paid to bank towards working capital. The assessee relied on the decision of ITAT, Special Bench in the case of Lalsons Enterprises (89 ITD 25) in this regard. The AO however rejected the claim of the assessee and held that the interest income required to be reduced by 90% from the profit of the business as per clause (baa) of section 80HHC is not net interest but the interest earned by the assessee. He therefore recomputed the deduction claimed u/s 80HHC by restricting the deduction to Rs.18,22,222/-. The assessee being aggrieved of the disallowance made by the AO challenged the same before the CIT (A).
11. In course of hearing before the CIT (A), the assessee contended that interest was earned mainly from margin money deposits and electricity deposits with banks and authorities for the 10 ITA Nos.218 and others of 2009 Avon Organics Ltd., Hyd.
purpose of business. These deposits were made from the funds borrowed from banks for which the assessee incurred interest expenditure. Hence, the interest received by the assessee is required to be set off against the interest paid by the assessee before excluding 90% thereof as per clause (baa) of Explanation to section 80HHC of the Act. In support of his contention, the assessee further relied on the decision of Hon'ble Delhi High Court in case of Sri Ram Honda Power Equipments ( 289 ITR 475). The CIT (A) following the decision of the ITAT, Special Bench Delhi in the case of Lalsons Enterprises(supra) and the decision of Hon'ble Delhi High Court in the case of Sri Ram Honda Power Equipments (supra) and in the case of Kashmir Arts (166 Taxman 237), held that before allowing netting of interest the assessee has to prove direct nexus between the interest receipts and interest payments. The CIT (A) therefore directed the AO to examine this aspect by observing in the following manner:-
"On due consideration, I agree with the arguments of the ld. AR. The issue is covered by the decision of Spl. Bench in the case of Lalsons Enterprise (89 ITD 25). However, it is held therein that before allowing the netting of interest, the assessee has to prove the direct nexus between the interest receipts and the interest payments. Similar ratio was laid down by the Delhi High Court in the case of Kashmir Arts (166 Taxman 237) after considering its decision in the case of Sri Ram Honda Equipments (supra). Since, the AO has not examined this aspect; he is directed to verify the relevant 11 ITA Nos.218 and others of 2009 Avon Organics Ltd., Hyd.
facts submitted by the appellant during the appeal proceedings. If the appellant is able to prove direct nexus between the interest receipts and the interest payments before excluding 90% thereof in terms of clause (baa of Explanation to sec. 80HHC."
12. The learned DR supporting the reasoning of the AO submitted before us that the CIT (A) was not justified in directing for setting off the interest income against interest payment before excluding 90% therefore for computing deduction u/s 80HHC. The learned DR in support of her contention relied upon the following decisions:-
i) CIT Vs. V. Chinnapandi (2006) 282 ITR 389 (Mad)
ii) Choudhary Garments Vs. DCIT (2003) 86 ITD 779
iii) CIT vs. Liberty Footwear Company (2006) 287 ITR 339
13. The learned AR strongly supporting the finding of the CIT (A) contended that as per clause baa of Explanation to section 80HHC interest income has to be set off against the interest payment before excluding 90% thereof for computing deduction/s 80HHC. In support of such contention, the learned AR further relied on the judgment of Hon'ble Supreme Court in the case of ACG Associated Capsules Pvt. Limited Vs. CIT (343 ITR 89).
14. We have heard rival submissions and perused the material on record. The only dispute in this case is as to whether 90% of the gross interest or the net interest is to be deducted under clause (i) 12 ITA Nos.218 and others of 2009 Avon Organics Ltd., Hyd.
of (baa) to section 80HHC for determining the profits of the business. In case of ACG Associated Capsules Pvt. Limited Vs. CIT (supra), the Hon'ble Supreme Court on interpreting clause (baa) of section 80HHC held in the following manner:-
"The facts of this case verv briefly are that Bharat Rasayan Limited for short" the assessee" filed al return of income- tax claiming a deduction of Rs. 72,76,405 under section 80HHC of the Act. In the assessment order, the Assessing Officer held that ninety per cent of the gross interest has to be excluded from the profits of the business of the' assessee under Explanation (baa) to section 80HHC of the Act and deducted ninety per cent gross interest of Rs. 50,26,284 front the profits of the business of the assessee . The assessee preferred an appeal contending that only ninety per cent of the net interest should have been deducted from the profits of the business of the assessee under Explanation(baa) to section 80HHC, but the Commissioner of Income- tax (Appeals) rejected this contention of the assessee. Aggrieved, the assessee filed an appeal before the Income Appellate Tribunal (for short "the Tribunal") and the Tribunal allowed the appeal of the assessee and held that the assessee was entitled to deduct the expenses from the interest received and only ninety per cent of the net amount of interest could be excluded under Explanation (baa)to section 801IHC and remitted the matter to the Assessing Officer to examine whether there is factually an excess between the interest paid and interest received and take a fresh decision. The Revenue filed an appeal against the order of the Tribunal before the High Court but by the impugned order the High Court following its decision in CIT v.ShriRain Honda Power in [2007] 289 ITR 475 (Delhi) sustained the order of the Tribunal and dismissed the appeal.
We have held in our judgment in the case of ACG Associates Capsules Pvt. Ltd. vs.CIT that ninety per cent of not the gross interest but only the net interest, which has been included in the profits of the business of the assessee as computed under the heads "Profits and gains of business or profession" is to be deducted under clause (1) of Explanation (baa) section 80HHC for determining the profits of the business. Since the view taken by the High Court in the impugned order is consistent with our aforesaid view, we find no merit in this appeal and we 13 ITA Nos.218 and others of 2009 Avon Organics Ltd., Hyd.
accordingly dismiss the same. There shall be no order as to costs. "
From the aforesaid decision of the Hon'ble Supreme Court it is clear that 90% of the net interest and not the gross interest which has been included in the properties of the business of the assessee as computed under the head profits and gains of business or profession is to be deducted under clause (i) of Explanation (baa) to section 80HHC for determining the profits of business. It is evident from para 2.3 of the CIT (A)'s which has been extracted herein above, the CIT (A) has directed the AO to find out whether there is nexus on the interest receipts and the interest payment and if there is a nexus, then interest receipt should be set off against interest payment before excluding 90% thereof in terms of clause (baa) of Explanation to 80HHC of the Act. In our view, the direction of the CIT (A) is in accordance with law and therefore needs no inference. While giving effect to the direction of the CIT (A), the AO shall also keep in mind the principles of law laid down by the Hon'ble Supreme Court in the case of ACG Associated Capsules Pvt. Limited (supra).
15. In the result, we dismiss the grounds raised by the Revenue.
16. Ground Nos. 4 and 5 are as follows:-
"4. The ld. CIT (A) erred in holding that the interest u/s 234B and 234C of the Act, 1961 should be computed after allowing the MAT credit.14
ITA Nos.218 and others of 2009 Avon Organics Ltd., Hyd.
5. The decision of the ld. CIT (A) is erroneous in view f the provision of section 219 of the IT Act as per which, MAT credit is not in the nature of advance tax".
17. Ground Nos. 4 and 5 relate to common issue as to whether interest u/s 234B and 234C of the Act just computed after allowing MAT credit. Briefly, the facts are the AO while completing the assessment computed the tax payable by the assessee and charged interest under sections 234B and 234C of the Act. Before allowing MAT credit u/s 115JAA of the Act.
18. The assessee challenged the same before the CIT (A). The CIT (A) following the decision of the ITAT, Chennai Bench in the case of Chemplast Sanmar Ltd. Vs. DCIT (83 TTJ 427), Synthetic Industrial Chemicals Ltd (90 ITD 851 (Cochin), Philips India Ltd., (92 ITD 441 (Chandigarh) directed the AO to re-compute interest u/s 234B and 2324C after allowing MAT credit.
19. The learned DR supporting the order of the AO and relying on a decision of Hon'ble Supreme Court in the case of JCIT vs. Rolta India L:imited (2011) 330 ITR 470 submitted that interest under sections 234B and 2324C are payable on failure to pay advance tax in respect of tax payable u/s 115JAA.
20. The learned AR on the other hand, while supporting the direction of the CIT (A) submitted that the issue is squarely covered 15 ITA Nos.218 and others of 2009 Avon Organics Ltd., Hyd.
by the decision of the Hon'ble Supreme Court in the case of CIT vs. Tulsyan Nec Ltd. (2011) 330 ITR 226.
21. We have heard rival submissions and perused the material on record. We have also examined the decisions cited at the Bar. There is no dispute to the fact that the Hon'ble Supreme Court in the case of JCIT vs. Volta India Limited (supra) has held that the expression "assess tax" would mean the tax assessed in regular assessment and will include the tax determined on application of section 115J/115JA in the regular assessment. Therefore, interest u/s 234B is payable on failure to pay advance tax in respect of tax payable u/s 115JA. However, the dispute in the present appeal is not with regard to the payment of advance tax on profit u/s 115JA but is confirmed to the issue is to whether MAT credit should be allowed before computing interest u/s 234B and 2324C of the Act. We find that the issue is squarely covered by the decision of Hon'ble Supreme Court in the case reported in 330 ITR 226 (supra). The Hon'ble Supreme Court held that interest u/s 234B and 234C has to be computed after giving MAT credit. In view of the aforesaid law laid down by the Hon'ble Supreme Court, we uphold the order of the CIT (A) and the grounds raised by the revenue are dismissed.
22. In the result, the appeal is dismissed.
16ITA Nos.218 and others of 2009 Avon Organics Ltd., Hyd.
ITA 1427/Hyd/2010:- (asasessee's appeal):-
23. The assessee has raised the following effective grounds:-
"1. The order of the CIT (A) is contrary to facts and law.
2. The CIT (A) erred in confirming the disallowance of Rs.9,87,042/- in respect of foreign commission paid to foreign agents on the ground that tax has not been deducted on the same."
24. Facts are identical with the facts involved in grounds No.2 raised in ITA No.218/Hyd/09 and ground No.3 in 223/Hyd/09. The AO disallowed the commission paid to foreign agents u/s 40A(1) by observing that the remittances made to foreign agents through telegraphic transfer obtained from banks, Hyderabad would amount to accrual or arising of income at the e hands of the non- resident in India. The assessee challenged the disallowance before the CIT (A). The CIT (A) observing that there being no material with regard to nature of services rendered by foreign agents the services rendered by them have to be treated as per the nature of technical services for facilitating the export sales. The CIT (A) further held that in view of the amendment brought to section 9(2) by the Finance Act 2010 by inserting an explanation with retrospective effect from 1-6-1976 the payment made to the foreign agents has to be treated as income arising in India. The CIT 17 ITA Nos.218 and others of 2009 Avon Organics Ltd., Hyd.
(A) therefore held that since the assessee has not deducted any tax, the same has to be disallowed as per section 40A(1) of the Act.
25. We have heard rival submissions and perused the material on record. Apart from our details reasons while considering the aforesaid issue in ITA No.218/Hyd/09 in paras 6 and 7, we are further of the view that the observation of the CIT (A) that in view of the amended provision of section 9(2A) he payment of commission made to the foreign agents has become taxable in their hands in India and therefore the assessee was required to deduct tax at source appears to be fetched. For the simple reason, that the aforesaid amended provision was brought to the statute in the Finance Act, 2010 giving retrospective effect from 1-6-1976. What is the commission payments to the foreign agents were made by the assessee during the financial year 2005-06. Therefore, the assessee could not have deducted tax at source on the basis made to foreign agents by anticipating the amendment brought to the statute by the Finance Act, 2010. That apart, in absence of any material brought on record by the AO that the foreign agents were rendering technical services, the inference drawn by the CIT (A) is without any basis. Even assuming for sake of argument that in view of the retrospective amendment to section 9(2) of the Act, the commission payment to the foreign agents is to be treated as taxable income in India either at their hands. However, no 18 ITA Nos.218 and others of 2009 Avon Organics Ltd., Hyd.
disallowance could be made of the commission payment u/s 40
(a)(i) of the Act in case of the assessee. We therefore direct for deleting the addition of Rs.9,87,042/-.
26. In the result, the appeal filed by the assessee is allowed.
Order pronounced in the court on 26-10-2012.
Sd/- sd/- (CHANDRA POOJARI) (SAKTIJIT DEY) ACCOUNTANT MEMBER JUDICIAL MEMBER Hyderabad, Dated the 26 th October, 2012. Copy to:-
1) ACIT, Cir-8(1), IT Towers, Near Masab Tank, AC Guards, Hyderabad..
2)M/s. Avon Organics Limited, Madhupala Towers, Opp. Green Lands Apartments, Ameerpet, Hyderabad.
3) The CIT (A)-III Hyderabad.
4) The CIT Concerned, Hyderabad
5) The Departmental Representative, I.T.A.T., Hyderabad.
Jmr*