Income Tax Appellate Tribunal - Chennai
Vtm Ltd., Virudhunagar vs Assessee on 20 April, 2010
IN THE INCOMETAX APPELLATE TRIBUNAL: B- BENCH:CHENNAI
(Before U.B.S.Bedi, Judicial Member and
Shri Abraham P. George. Accountant Member )
ITA No.1209/ Mds/10
&
CO No.70/Mds/10
(Asst. year 20078-08)
The ACT vs M/s VTM Limited,
Cir. I, Virudhunagar Sulakarai,
Virudhunagar 626003
(PAN AAACV3775E)
(Appellant) (Respondent/Cross-objector)
Appellant by: Shri P.B.Sekaran, CIT-DR,
Respondent/Cross objector by: Shri R.Srinivasan
ORDER
PER ABRAHAM P.GEORGE, ACCOUNTANT MEMBER--
These are appeal of the Revenue and cross-objections of the assessee against the order dated 20-04-2010 of the CIT(A) for the assessment year 2007-08.
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2. Grievance raised by the Revenue in its' appeal is that the CIT(A) deleted disallowance of `90,71,755/-, which was effected by the AO for non deduction of tax on payments made to foreign agents. As per the AO such payments required deduction of tax at source in terms of sec.195 of the Income-tax Act, 1961 ('the Act' for short) and therefore, assessee having not made any such deduction, the amount was required to be disallowed under sec.40(a)(i)(A) of the Act.
3. Short facts are that assessee, in the business of running textile mill, claimed payment of commission of `90,71,755/- to parties outside India. No deduction of tax at source was made on such payments. According to the AO, tax was deductible at source on such payments and assessee having not deducted it, the claim had to be disallowed under sec. 40(a)(i)(A) of the Act.
4. In its appeal before the CIT(A), argument of the assessee was that commission was paid to the foreign agents for selling products of the assessee in such country and therefore, such foreign agents were not liable to pay any Income-tax under the Act. According to the assessee, it did not effect any deduction of tax under sec. 195 since there was no income arising out of such payments to the recipient which was chargeable to tax in India. Reliance was placed on the CBDT Circular No.23 dated 23- 3 ITA.1209&CO.70/Mds/10 07-1969 and Circular No.786 dated 07-02-2000 in this regard. Ld. CIT(A) was of the opinion that the decision of the Hon'ble Apex Court in the case of Transmission Corporation of India P. Ltd. vs. CIT (239 ITR 587) supported the case of the assessee that liability to deduct tax at source arose only when the amount paid to the non resident was chargeable to tax. He thus deleted the disallowance.
5. Now before us, the ld. DR assailing the order of the CIT(A), submitted that the decision of Special Bench of this Tribunal in the case of ITO vs. Prasad Productions Ltd. (37 DTR 418) did support the view than an assessee under a bonafide belief that no part of payment made to a non-resident was chargeable to tax, was not obliged to deduct tax at source. However, according to the ld. DR, here there was nothing on record to show how the assessee came to a bonafide belief regarding the payments effected by it to the non-resident agents being not chargeable to tax. According to him, CIT(A) had simply relied on Circular Nos.23 and 786 mentioned supra for deleting the disallowance made by the AO without verifying the bonafide nature of the claim of the assessee that the amounts were not taxable in India.
6. Per contra, the ld. AR submitted that the AO had indeed examined the claim made by the assessee that no part of the payment of commission 4 ITA.1209&CO.70/Mds/10 made to the non-resident were chargeable to tax in India. But he nevertheless made disallowance under sec. 40(a) of the Act without properly appreciating the submissions of the assessee. According to the ld. AR, Circular No.23 dated 23-07-1969 read along with Circular No.786 dated 07-02-2000 would clearly go to show that payment of commission to non-resident agents, where such non-resident agents operated outside the country, would not be liable for deduction of tax under Sec. 195 of the Act. According to ld. AR, Circular No.7 dated 22-10-2009 withdrawing the above mentioned earlier Circulars, had effect only from that date and would not act retrospectively. For this proposition, reliance was placed on the decision of the Hon'ble jurisdictional High Court in the case of CIT vs. Prasad Productions P. Ltd. (179 ITR 147), Hon'ble Bombay High Court in the case of Unit Trust of India v. P.K.Unny (249 ITR 612) and BASF (India) Ltd.& Another vs. W. Hasan, CIT (280 ITR 136).
7. We have perused the orders and heard the rival submissions carefully. The question of deduction of tax at source under sec. 40(a)(i) would arise only if the payment made by the assessee was a sum chargeable under the Act on which tax was deductible at source under Chapter XVII-B and no such deduction was effected. Under the said Chapter Sec. 195 deals with payments made to non-residents. There could 5 ITA.1209&CO.70/Mds/10 be no doubt that the decision of the Special Bench of the Tribunal in the case of Prasad Products Ltd. (supra) clearly held that it was the payer who was the first person to decide whether the payment he was making, bore any income character or not. Special Bench also held that when payer held a bonafide belief that no portion of the payment had any part chargeable to tax, then Sec. 195 would be totally inapplicable. This view has been upheld by the Hon'ble Apex Court in the case of G.E. India Technology P. Ltd. v. CIT in CA 7541 and 7542 of 2010 dated 09-09-2010. After referring to its' own earlier decision in Transmission Corporation (supra), relied on by him the ld. CIT(A) for giving relief to the assessee, it was held by the Hon'ble Apex Court that sec. 195(1) of the Act itself clearly laid down that tax at source was deductible only from sum chargeable under the provisions of the Act viz. under Sections 4, 5 and 9 of the Act. Hon'ble Apex court, after going through sec.195 of the Act further held that the words "any other sum chargeable under the provisions of the Act", had to be given due weightage, while interpreting the issue regarding liability to tax at source. But nevertheless there can be no doubt that an assessee had to carry a bonafide belief that the payment he was effecting to the non-resident was not chargeable to tax in India for claiming that he was not liable to make any deduction of tax at source thereon under sec. 195 of the Act. As per the assessee, Circular No.23 dated 23-07-1969 of the CBDT clarified that income accruing or arising to a non-resident would be taxable in India only 6 ITA.1209&CO.70/Mds/10 if there it was having a business connection in India. We find that para- four of the above Circular clearly mentions that commission received by foreign agents of Indian exporters who operated in their own country, was not part of any income of such foreign agents arising in India, if commission was remitted directly to such foreign agents, and such agents were not liable to Income-tax in India on the commission. Again in Circular No.786 dated 07-02-2000 at para-2 CBDT declared as under:
"2. The deduction of tax at source under s.195 would arise if the payment of commission to the non-resident agent is chargeable to tax in India. In this regard attention to CBDT rd Circular No.23, dated 23 July, 1969 is drawn, where the taxability of "Foreign Agents of Indian Exporters" was considered along with certain other specific situations. It had been clarified then that there where the non-resident agent operates outside the country no part of his income arises in India. Further, since the payment is usually remitted directly abroad it cannot be held to have been received by or on behalf of the agent in India. Such payments were therefore, held to be not taxable in India. The relevant sections, namely sec. 5(2) and sec. 9 of the Income-tax Act, 1961 not having undergone any change in this regard, the clarification in Circular no..23 still prevails. No tax is therefore, deductible under sec. 195 and consequently the expenditure on export commission and other related charges payable to a non-resident for services rendered outside India becomes allowable expenditure. On being apprised of this position the Comptroller & Auditor General have agreed to drop the objection referred to above."
8. No doubt, these Circulars would absolve the assessee from the liability to deduct tax on commission paid to the foreign agents where such foreign agents operated outside the country and no part of its income arose in India. However, these Circulars would not absolve the assessee from discharging its onus that it held a bonafide belief regarding non deductibility of tax at source on payments of commission made by it to the non-resident based on conditions set out in the said circulars. Here, in the case before us, the AO had simply made a disallowance on a premise that 7 ITA.1209&CO.70/Mds/10 TDS was always deductible on payments made to a non-resident. As against this, ld. CIT(A) went by the argument of the assessee that the foreign agents were selling the product of the assessee in their country and such agents were not liable to pay Income-tax under the Act in India. There was no verification of the bonafide nature of the belief held by the assessee that payments made by it to the foreign agents were not liable to tax in India based on Circular No.23 dated 23-07-1969 and circular No.786 dated 07-02-2000. That these circulars were time and again used for claiming relief which was not intended, has been clarified at para-2 of the Circular No.7 pf 2009 dated 22-10-2009 of the CBDT, whereby earlier circulars mentioned supra were withdrawn. No doubt, we do appreciate the contentions of ld. AR that Circular dated 22-10-2009 withdrawing the earlier Circulars had only prospective and agree with it. Nevertheless, as already stated by us, there was no demonstration by the assessee at any stage of the proceedings nor any verification done by the authorities below regarding the bonafide nature of its belief that the payments which were effected by it to the foreign agents were not exigible to tax in India under the Act. We are, therefore, of the opinion that the matter needs to be revisited by the AO. We, therefore, set aside the orders of the authorities below and remit the issue regarding disallowance for non-deduction of tax on payments effected to foreign agents back to the file of the AO for fresh consideration regarding the bonafide nature of the claim of the assessee. 8 ITA.1209&CO.70/Mds/10 Assessee should be given an opportunity to present necessary evidence in this regard.
9. Appeal of the Revenue is allowed for statistical purposes.
10. Now we take up the cross-objection raised by the assessee. Grievance of the assessee in this cross-objection is that the CIT(A) erred in confirming the disallowance of expenditure made by the AO under sec.14A of the Act read with Rule 8D of the Income-tax Rules, 1962 ("the Rules" for short).
11. Facts apropos this issue are that assessee had during the relevant previous year received dividend of `79,00,382/-, which it claimed as exempt under sec.10(34) of the Act. AO put the assessee on notice that expenses incurred for earning exempt income had to be disallowed under sec.14A of the Act. Assessee's contention was that demat charges alone was incurred for earning the income and nothing else. AO was, however, not happy with it, for, according to him, other expenses like interest would have been incurred by the assessee and Rule 8D of the I.T. Rules had to be applied for working out the expenses which were to be disallowed under Sec.14A of the Act. Assessee was required to give a work out for the disallowance. Thereupon it gave a statement wherein the disallowable 9 ITA.1209&CO.70/Mds/10 amount was mentioned as `1,91,002/-. However AO was of the opinion that the assessee had made exclusion of interest paid while working out the said sum. He therefore, worked out the disallowance under sec. 14A and fixed it at `3,69,470/-.
12. Before the CIT(A) argument of the assessee was that the AO had considered the entire interest paid including interest paid on term loan for purchasing machinery, for calculating the disallowance. According to assessee, interest on term loan availed for purchasing machinery could never be considered while working out the disallowance under sec. 14A of the Act. Further according to the assessee, only if the AO was dissatisfied with the working given by assessee, he could resort to Rule 8D of the Rules. Hence it was argued that except for demat charges of `1,116/- nothing else could have been disallowed under sec. 14A of the Act.
13. Ld. CIT(A), however, did not accept the averments of the assessee. According to him, Rule 8D provided for disallowance of proportionate expenditure incurred by way of interest and there was no provision for excluding any interest paid for specific purpose while making such calculation. He, therefore, confirmed the disallowance made by the AO. 10 ITA.1209&CO.70/Mds/10 14, Now before us, the ld. AR submitted that disallowance under sec. 14A of the Act could be made only if there was a proximate nexus between the exempt income earned and expenditure incurred. Reliance was placed on the decision of Hon'ble Apex Court in the case of CIT vs. Walfort Share & Stock Brokers (P) Ltd.(326 ITR 1). Further according to him, Rule 8D which was notified on 24-03-2008 would apply only from Asst. year 2008- 09 and the decision of the Special Bench of the Tribunal in the case of ITO vs. Daga Capital Management P .Ltd. (117 ITD 169) did not hold the field in view of the decision of Hon'ble Bombay High Court in the case of Godrej &Boyce Mfg. Co. Ltd. vs. DCIT (ITA No.626 & WP 758 of 2010 dated 12- 08-2010). Further according to him, Hon'ble Punjab & Haryana High Court in the case of CIT vs. Hero Cycles Ltd. (323 ITR 518) had held that unless an expenditure was incurred for earning the exempt income no disallowance under sec. 14A of the Act could be made.
15. Per contra, ld. DR strongly relied on the order of the AO and submitted that the disallowance was correctly worked out.
16. We have perused the orders and heard both the parties. As per the assessee, the only amount expended for earning dividend of `79,00,382/- was demat charges of `1,116/- and nothing else. As for the work out given by the assessee, wherein `1,91,002/- was shown to be the amount 11 ITA.1209&CO.70/Mds/10 disallowable under Rule 8D of the Rules, CIT(A) has clearly mentioned that this was furnished at the behest of the AO. Hence such a working out cannot be considered as an admission by the assessee for making a disallowance under Rule 8D of the Rules. No doubt, in the case of Daga Capital Management P. Ltd. (supra) the Special Bench of this Tribunal did hold that Rule 8D applied retrospectively and sub-sections (2) and (3) of sec. 14A of the Act were procedural in nature and applied for all pending matters. However, Hon'ble Bombay High Court in the case of Godraj & Boyce Mfg. Co. Ltd. (supra) clearly held that Rule 8D which was notified on 24-03-2008 would apply w.e.f. Asst. year 2008-09 only. Hon'ble Bombay High Court also held that even prior to Asst. year 2008-09, when Rule 8D was not applicable, AO had to enforce the provisions of sub-sec. (1) of Sec.14A of the Act. Thus, though the decision of the Special Bench that Rule 8D had retrospective effect, was overturned by the Bombay High Court, it was also clearly held that the AO was duty bound to disallow the expenditure which was incurred in relation to income which did not form part of the total income under the Act. Hon'ble Bombay High Court further held that AO had to adopt a reasonable basis or method consistent with all relevant facts and circumstances, after giving a reasonable opportunity to the assessee to place all germane material on record. No doubt, Hon'ble Apex Court in the case of Walfort Share & Stock Brokers (P) Ltd.'s case (supra) held that for attracting sec. 14A of the Act there had to be a 12 ITA.1209&CO.70/Mds/10 proximate cause between the exempt income and expenses. Hon'ble Apex Court was seized of an issue regarding business loss set off against dividend income on units bought cum dividend and sold ex-dividend. Contention of the Department in that case was that expenditure claimed by the assessee should be treated as incurred for purpose of earning exempt income and hence it had to be disallowed. It was not a claim for expenditure but a claim for business loss arising out of purchases of units cum dividend and thereafter selling it at lower cost on ex dividend basis, after receiving the dividend. Hon'ble Apex Court held that the only impact on the exempting provision sec.10(33) for unit's income is by sec. 94(7) of the Act and one could not interpret sec.14A as leading to the same conclusion, as then sec. 94(7) of the Act would be rendered nugatory. The case of Hero Cycles Ltd. (supra) of Hon'ble P&B High Court was an appeal filed by Department which was dismissed as not involving substantial question of law. The reason mentioned by the Hon'ble P&B High Court was that when for earning exempt income no expenditure was incurred, disallowance under sec.14A would not stand.
17. We are of the opinion that the various decisions mentioned by us supra would lead to following view with regard to application of Sec.14A and Rule 8D as it stands today.
:
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1. Though Sec. 14A has been inserted with retrospective effect from 01-04-1962 and since Rule 89D has been notified only on 24-
03-2008, it would be effective only from Asst. Year 2008-09 onwards.
2. For earlier Asst. years, though the expenses pertaining to exempt income are not allowable, the disallowance has to be on a reasonable basis having regard to the accounts of the assessee and after furnishing a reasonable opportunity for the assessee to place all germane material on record.
. 3. This in effect would mean that the disallowance under sec.14A read with Rule 8D cannot exceed actual expenses debited in the P&L account and that the notional disallowance specified in the Rule 8D(2) cannot exceed the actual expenditure incurred by the assessee, as an expenditure which has not been incurred and claimed cannot be disallowed.
18. We find that in the instant case before us, the authorities below had gone by an assumption that Rule 8D of the Rules applied for the impugned Asst. year though such Rule was notified only on 22-03-2008. As already mentioned by us, as the law stands today, such Rule had only prospective effect. The case of the assessee has not been tested based on the law that emerges out of the various decisions mentioned supra. Assessee, in fact, in its appeal before the CIT(A) never raised the contention regarding non applicability of Rule 8D in the impugned Asst. year. But at the same time, as already mentioned by us, assessee had always argued that only demat charges paid was incurred for earning dividend income and it was constrained to give a work out based on Rule 8D at the behest of the AO. 14 ITA.1209&CO.70/Mds/10
19. We are therefore, of the opinion that this matter need revisit by the AO. We, therefore, set aside the orders of the authorities below and remit the matter to the AO to consider the disallowance, if any, if required to be made under sec. 14A of the Act based on the various judgments mentioned supra. Assessee would be free to produce necessary evidence and records in support of its claim before the AO, as also any other decision of higher judicial authorities which have to be duly considered by the AO.
20. In the result, cross-objection filed by the assessee is allowed for statistical purposes.
21. To summarise the result, both the appeal of the Revenue as well as cross-objection of the assessee are treated as allowed for statistical purposes.
Order pronounced in open Court on 25-02-2011.
Sd/- Sd/-
( U.B.S.BEDI) (ABRAHAM P. GEORGE)
Judicial Member Accountant Member
Chennai: 25th February, 2011.
Nbr"
Cc: Assessee/ Assessing Officer/ CIT(A)/ CIT/ D.R/ Guard File.
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ITA.1209&CO.70/Mds/10