Income Tax Appellate Tribunal - Delhi
Dcit Central Circle-31, New Delhi vs Cheslind Textiles Ltd. , Rajasthan on 1 June, 2022
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH 'B', NEW DELHI
Before Dr. B. R. R. Kumar, Accountant Member
Sh. Anubhav Sharma, Judicial Member
ITA No. 5929/Del/2019 : Asstt. Year : 2012-13
DCIT, Vs Cheslind Textiles Ltd.,
Central Circle-31, Kharigram, P.B. No. 28, Post
New Delhi-110055 Office-Gulabpura, Distt.
Bhilwara, Rajasthan-311021
(APPELLANT) (RESPONDENT)
PAN No. AABCC2435K
Assessee by : Sh. S. S. Nagar, CA
Revenue by : Ms. Shashi Kajle, Sr. DR
Date of Hearing: 02.05.2022 Date of Pronouncement: 01.06.2022
ORDER
Per Dr. B. R. R. Kumar, Accountant Member:
The present appeal has been filed by the Revenue against the order of ld. CIT(A)-30, New Delhi dated 30.04.2019.
2. Following grounds have been raised by the Revenue:
"1. On the facts and in the circumstances of the case, the Ld . CIT(A) has erred in deleting the disallowance made u/s 40(a)(i) of the Act in respect of payments of Rs. 2,41,93,337/- being commission on export sales.
2. On the facts and in the circumstances of the case, the Ld . CI T(A) has erred in not appreciating the content of CBDT Circular No. 05/2014 dated 11.02.2014 which clarifies that Rule 8D read with Sec 14A of the Act provides for disallowance of the expenditure even when the taxpayer in a particular year has not earned any exempt income.2 ITA No.5929/Del/2019
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3. On the facts and in the circumstances of the case, the Ld . CI T(A) has erred in not appreciating the fact that the assessee should have claimed the TUF subsidy by filing revised return income.
4. On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in ignoring the facts that TUF subsidy received by the assessee is a revenue receipt."
Co mmission on Sales:
3. The assessee has appointed agents at various countries, made export of g oods and paid commission to the non-resident agent under the head "commission on export sales" amounting to Rs.2,41,93,337/-. The AO held that the income arises in India to the foreign agents which is chargeab le to tax in India.
The ld. CIT(A) relying on the order for the A.Y. 2011-12 in assessee's own case allowed the appeal of the assessee.
4. For the A.Y. 2010-11 and A.Y. 2011-12, the appeal of the assessee on the similar issue has been allowed by the Co- ordinate Bench of the ITAT holding as under:
"6 . We hav e c onsidered t he rival s ubmissions as well as the rel ev ant material on rec ord. The payment in ques tion was paid by the ass es see to vari ous overs eas marketi ng agent s as per the respec tive agreem ents bet ween the ass essee and the agents. Mar keti ng agents were appoi nt ed to market, promote and sal e the produc t of the ass essee withi n the res pective territor y i n accord ance with the terms of the agreements. Therefore, the pa yment was made to the market a gents agai nst the perf ormance to collec t informati on regarding the produc ts and to deal with the customers of the assess ee i n res pect of the sale of the assess ees produc ts in the respective t erritori es. The paym ent is ter med as commission payable to t he marketing agent s as per Cla use 2 of t he agreement which is based on FOB value of t he product as a percentage t o be decided on case t o cas e basis for the s ervic es rendered outside I ndia. Thus it is clear from the terms a nd conditions of the agreement t hat the pay ment i n question were ma de to the non-resident marketi ng agents for their s ervices rendered outside India. It is admitted fac t t hat these non-res ident 3 ITA No.5929/Del/2019 Cheslind TextilesLtd.
agent s have non PE i n India ther efore the incom e i n their hand whic h is not a royalt.x-.4.e.for Tec hnical Services' (i n short 'FTS ') is not chargeable to tax in India, The Ass essi ng Of ficer has not given a findi ng that t he pay ment in question is in the natur e of FTS or r oyalt y a s per the provisions of Secti on 9 (1)(vi) and 9(1 )(vii) of t he Act. Onc e t he payment in ques tion is not treat ed as ETS or royalty then, the same bei ng busi ness i ncome in t he hands of the non-resident marketi ng agents is not chargeable to tax i n India in the abs enc e of PE. T he CIT (Appeals) has allowed the claim of the assess ee by gi ving the findi ng i n paras 5 & 6 as under:
"5 . I have c ons idered the appellant's s ubmission also perus ed the asses sment order. The appellant engaged in the manuf acture and export of cot ton yarn/kni tted fabrics. The observati on of the Assessi ng Offic er is that the appellant has debited a s um of Rs.1 ,68,59,037 towards an export sol es and on s uch commission TOS was not deduct ed. However, the appellant's c ontention is t hat the appellant company had appoi nted a gents a t vari ous c ountries to collect orders and pass them to the company in India for export of the goods dealt by the c ompany. These agent s are paid agreed commission bas ed on the qua ntity /f ree of the exported goods a gai nst the or der proc ured by the agent. The operation of the agents operates on behalf of the appella nt c ompany. Thes e agents do not ha ve any operation in I ndia nor do t hey carry out any other busi ness i n India. The appellant had f urnis hed c opies of 'Marketi ng A gency Agreement' a nd from it tr anspires that agent s ar e non-resident agent and t heir busi ness operati on in abroad onl y a nd P E whats oever in India . In this c ont ext the appellant plac ed reliance on the decision of the Hon'ble ITAT, Hyderabad in the c as e of DC IT Vs. Divi 's Laboratori es Ltd. (2011) 12 tax mann.Com 103 (Hyd) -
9. It Is pertinent to note t hat s . 19 5 of the Act has to be read al ong wit h the c harging ss . 4, 5 and 9 of the Act. One shoul d not r ead s. 195 to mea n that the moment t here is a remittanc e, the obli gation to deduct TDS aut omatically arises . I f we were to acc ept suc h c ontention, it would mean that on mer e payment i n India, i ncome would be s aid to arise or accrue in India.Thes e are the observations made i n the jud gment of apex C ourt i n the c as e of G E India Tec hnol ogy Centre (P) Ltd. vs . C IT (supra) relied on b y the learned c ounsel for the ass ess ee, for the propositi on that provision are tax applies onl y to t hos e s ums whi ch are chargeable to tax under the IT Act . If the contentions of the Depa rtment are t o be taken as c orrect that a ny person making payment to a nonresident is nec essarily required to deduc t t ax, t hen the cons equence woul d be that the Depa rtment would be entitled t o appropriat e t he moni es deposited by t he pay er ev en if the sum paid is not 4 ITA No.5929/Del/2019 Cheslind TextilesLtd.
chargeable t o tax becaus e there is no pr ovision t he IT Ac t by which a payer can obtai n refund. As per s . 237 r.w.s . 199 of the Act i mplies t hat onl y the recipient of the sum i.e., pay ee would seek a r efund. I n vi ew of the abov e, henc e, no tax is deductibl e under s. 195 of the A ct on commission payments and c ons equently t he expenditure on export commission paya ble to non-resident f or services rendered outside I ndia becomes allowabl e ex penditure and the s ame is outside ri gours of the s. 40(a)(ia) of the Ac t.
10. The judgment of the Karnat aka High C ourt i n t he cas e of Sams ung El ectroni cs C o. L td. & Ors. vs . C IT & Ors. (2009) 227 CTR (Kar) 335 (2009) 31 DTR (Kar) 257 : (2010) 320 ITR 209 (Kar) reti ed on by the Depa rtment, dealt on whether tax is to be deduc ted at source, under s. 195 of the Act, i n r esp ect of payment made to non-resident, on import of soft ware. The judgment of the Karnataka Hi gh C ourt is largely based on t he j udgment of Supreme Cour t in the case of Trans mission Corpora tion of AP Ltd. & Anr. vs. CIT (1999) 155 CTR (SC ) 489 (1999) 239 ITR 587 (SC ). However, t he K arnataka High C ourt not f ollowed the subseq uent bi ndi ng j udgment of t he Supreme Cour t in the case of Vijay Ship Breaking C orpn. & Ors vs CIT (2008) 219 CTR (SC) 639 : (2008) 14 DTR (SC) 74 : (2009) 314 ITR 309 (S C) wherei n t he apex Court has categorically held that the resident is not requir ed to deduct TDS under s . 195(1) of the Act, if the incom e of non-resident recipient is not taxable i n India. Given t his bindi ng precedent, the jud gment of Karnataka High C ourt in the case of Sa msung El ectronics Co. Ltd & Ors. vs. C IT & Ors . (supra ) would not apply to the c as es where the non-r esident recipient i s not tax abl e i n India, We als o fi nd that the j udgment of apex Court in t he cas e of Is hi kawajrna-Harim a Heavy Industri es Ltd. vs . Director of IT (2007) 207 CTR (SC) 361 (2007) 288 ITP. 408 (SC) wherei n it was held t hat f or s. 195 is to be att rac ted, t he services rendered by the nonresident shoul d have been rendered i n India and also should have been us ed in India and that, t his twi n tests has to be satisfied for s. 195 is to be a ttract ed. We fi nd t hat t he legislati on introduc ed the Explanation to s. 9(2) of the Act , after this j udgment , wit h retros pec tive effec t fr om 1s t June, 1976 in the Fina nce Act, 2007, Despite this intr oducti on of Ex planation to s. 9(2) of t he A ct, the Karnata ka Hi gh C ourt i n the cas e of Ji ndal T hermal Power Co. Lt d. vs. Dy. CIT (2009) 225 CTR (Kar) 220 (2009) 26 DTR (Kar) 172 : (2010) 321 ITR 31 (K ar) hel d that the law laid down by the apex C ourt i n the cas e of Is hi kawajima Harima Heavy Ind ust ries Ltd. (s upra) still holds good des pite the retros pec tive amendment to S. 9 of the Pt. In our opi nion, the requi rement of services of the nonresident bei ng rendered in India and bei ng utilized i n I ndia is still valid, des pite the j udgment of t he K arnataka Hi gh Court in the cas e of Sams ung Elec tronics Co. Ltd. & Ors . (supra) 5 ITA No.5929/Del/2019 Cheslind TextilesLtd.
and wit hdrawal of earlier circ ulars issued on t his s ubj ect by CBD T.
11. I t is well -settled law that the pr ovisi ons of DTAA woul d prev ail over t he provisions of the IT Act, would seem to have been c ompletely not f ollowed by K arnat aka Hi gh C ourt whil e rendering the j udgment i n the case of Sam sung El ectronics C o. Ltd . & Ors. (s upra). Therefor e, i n our considered opi nion, the law related to deduc tion of tax at source under s. 195 has not been changed c ons equent to the judgment of Samsung Electronics C o, Ltd. & Ors . (supra) or wi t hdrawal of earlier circulars , on this issue by the CBDT a nd therefor e the rigours of s. 40(a)(0) of the Act, disallowanc e of expenditure, is not attr act ed f or the paym ents ma de t o t he overs eas agents by the assess ee without deduction of TDS . In the case under consideration, t he CIT(A ) obs erv ed t hat the AO has not been abl e to establish that there is specific i ntention of the payee t o r eceive the payment wit hin t he territ ory of India as per the decision i n the case of Ogale Glass Works Ltd. (supra); t heref ore, in our opi nion, the C IT(A ) ri ghtly did not agree wi th the view taken by the A0 with regar d to the addition made on t his issue and henc e, t he C IT(A ) is justified in direc ting the A O t o delete t he said addition. After c onsideri ng t he t otality of facts and t he circ umst anc es of t he c ase, we are not incli ned to int erfere with t he order of t he CIT(A) on this iss ue and accordingly the sa me is upheld. H ence the grounds raised by the R evenue for all the years under c onsideration are rejected"
6. A plain readi ng of t he Hon'ble IIAT, Hyderabad the issue on hand is squarel y applicable and respectf ully f ollowing the said decision, the Assessi ng Offic er is direc ted to allow of Rs.1,68,59,037 as ded uction under Secti on 37 of the Act.
Thus it is clear t hat the C IT (Appeals ) has f ollowed the decisi on of the Trib unal i n cas e of Divi's Labor atories Pvt. Ltd. (supra). The lear ned Departmental R epresentativ e has not brought to our notice any contrary decision/pr ecedenc e. In view of the abov e facts and circums tanc es of the ca se where the c ommission payment i n question is not tr eated by the Assessi ng Of ficer as ITS or royalty t hen i n the absence of PE, it is not chargeabl e to ta x in India. The learned Depa rtmental R epres entative has relied upon the Explanati on 2 of S ecti on 195(1 ) of t he Ac t. However, we are of the vi ew that this Explanation 2 to S ection 195(1) woul d not obliterate the prerequisite c ondition of S ecti on 1 95(1) that "s um chargeable under the provisions of the Act ". We f urther note that an identical issue has been considered by t he co-or dinate benc h of this Tribunal in the case of Za nav H ome C ollecti on (supra) in paras 3 8 t o 41 as under:6 ITA No.5929/Del/2019
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38. We have consi dered the rival submissions. The copies of the A greement between the Ass essee a nd t he non-resident (7 out of the 10 non-residents listed in t he earner part of this order) has been filed bef ore us as A nnexure-H i n the paper book filed by the Assess ee. The main clauses in the agreement needs to be seen to appreciate the contentions of t he parties bef ore us.(A greem ent between Assess ee and M/.Duo Textiles ).
Cla use-1, 3 and 4 of the A greement reads as follows:
1. APPOINTMENT: Pri ncipal grants A gent t he ri ght t o sell the merc handise (stipulated i n Article 2 ) i n the territory (stipulated in Article 3) a nd Agent accepts s uch appoi ntment. 3. TERRIT ORY : The Territor y cov ered under this a greement is confi ned to S outh Africa. 4, C OMMIS SION:
Pri ncipal s hall allow t he A gent 5% commission f or all Merc handise (bas ed on FOB pric es) Com mission ar e not payabl e later than 2 (two) months after merc handis e have been shi pped i n res pect of all orders whic h hav e been accepted and ex ec uted by Principal. Howev er, t hat no such commissions shall be payable until Principal rec eives the full amount of payment due t o hi m."
39. The terms of the A greement i n the cas e of all the agent s are identical. It is clear from the agreements that the nonresidents render ed s ervices outside India and the nature of s ervices rendered by t hem is as agent of and Indian exporter operati ng i n his own country. There is absol utely no territ orial nexus wit h India as f ar as the non-residents are c oncerned. The nonresident's s ourc e of i nc ome outside India and acc rues a nd arises outside I ndia. The Hon'ble Supreme Court i n the case of C aroorandum C o. v. C IT (1977) 108 ITR 335, has held t hat "the carryi ng on of activities or operations in India is essential to ma ke the nonresident have busi ness connecti on i n India i n order that he may be liabl e t o tax i n respect of the income attrib utable to that business connecti on t he CBDT in Circ ular No. 17(XXXVII) of 1953 dated 17t h July, 1953 has stated as follows:-
"Forei gn agent s of Indian export ers - A f oreign agent of an Indian exporter opera tes i n his own c ountr y and no part of his inc ome aris es in India. Usually, his commission is remitted dir ectly to him; arid is, t heref ore, not received by or on his behalf in India. S uch a n a gent is not liable to Indian inc ome tax."
The CBDT circ ul ar No.786 dated 07/02/2000 regardi ng tax ability of export c ommission payable t o non-resident 7 ITA No.5929/Del/2019 Cheslind TextilesLtd.
agent s renderi ng ser vices abroad has sta ted t hat "No tax is ther efore deduc tible under section 1 95 and consequently the expenditure on export commission and other relat ed char ges payabl e to a non-resident for s ervices render ed outsid e India becomes allowabl e expenditure." The c oncl usions of the AO and C IT(A) that the non-resident had a business connecti on i n India in our view is without any basi s and ca nnot be sustained.
40. On applicability of Expi n-2 t o Sec.195(1 ) of the Act whic h was i ntroduced by t he financ e Act 2012 w e f 1 4 i962 we are of the vi ew. That t he said explanati on is applicable only when there is accrual of income i n India. When the conclusi on reached is that t here is no a ccrual of income in India, we f ail to s ee how Expi n,2 t o Sec . 1951) of t he Act are at tracted.
41. In vi ew of the above c onclusi ons , we ar e of the view that ther e was no obligation on the part of t he Asses see to deduc t tax at s ourc e while maki ng payment to the non- resident . Consequently, no disallowance of c ommission expenses paid to non-resident c oul d be made invoki ng the provisions of sec. 40a)(1 ) of the A ct. We hold acc ordingl y and direc t the AO to d el ete the disallowanc e so ma de.
Accordi ngly , in vi ew of t he f acts and circumsta nces of the case as well as t he decision of this Tribunal, we do not fi nd any error in the i mpugned or der of the C IT (Appeals)."
5. In the absence of any material change in the facts of the case and the legal preposition, we hereby delete the appeal of the Revenue on this ground.
6. The assessee made an investment to the tune of Rs.2,55,00,000/- to purchase wind power under captive consumption with the power generating companies and has earned no exempt income. Owing the judgment of Hon'ble Apex Court in the case of PCIT Vs Oil Industry Develop ment Board in SLP (Civil) Diary No. 2755/2019, we hereby hold that the provisions of Section 14A cannot be invoked in the absence of any exempt income claimed by the assessee.
8 ITA No.5929/Del/2019Cheslind TextilesLtd.
Claim of TUF subsidy - Capital receipt:
7. The assessee has taken up additional grounds and prayed for the ad mission thereof for consideration of claim of Technology Upgradation Fund (TUF) subsidy as capital receipt. Admission of the additional ground has been opposed in principle by the ld. DR. Keeping in view, the judgment of the Hon'ble Apex Court in the case of National Thermal Power Co. Ltd. Vs CIT (1998) 229 ITR 383, the additional ground filed by the assessee is accepted. The relevant portion of the judgment is as under:
"5 . U nder Secti on 254 of t he Income-tax Act , the Appellate Tribunal may, af ter gi vi ng both the parti es to t he appeal an opportunity of bei ng heard, pass such orders thereon as it thinks fit. The power of t he Tribunal in dealing with app eals is thus ex pressed in the wi des t possible terms . The purpose of the assessment pr oceedi ngs before the taxi ng authorities is to assess correctly the tax liability of an assess ee i n acc ordanc e wit h law. If, f or example, as a res ult of a judicial decision giv en while the appeal is pendi ng bef ore the Tribunal, it is f ound t hat a non-taxabl e it em is ta xed or a per missibl e deduction is denied , we do not see any reas on why the ass essee s houl d be prevented fr om raising that question befor e the tribunal for the firs t time, s o long as the rel evant f acts are on r ecord i n res pect of that item. We d o not s ee any reas on to restrict t he power of the Tribunal under Section 254 only t o decide the gr ounds whic h arise from the order of t he C ommi ssioner of Inc ome-tax (Appeals). B oth t he ass essee as well as t he D epartment have a ri ght to file an appeal/cross -obj ec tions b efore the Tribunal. We f ail to s ee why the Tribunal shoul d be pr event ed f rom consideri ng questi ons of law arisi ng i n ass essment proceedings although not rais ed earlier.
6. In t he case of Jute C orporati on of India Lt d. v . C .I .T. . t his C ourt , while dealing wi th t he powers of the Appellate Assistant C ommissioner obser ved t hat an appellate a uthority has all the powers which the ori ginal authority may hav e i n deciding the question before it s ubject to the restricti ons or limitati ons , if a ny, pr esc ribed by the statutory provisions. In the abs ence of any st atut ory pr ovision, t he appellat e authority is vested wit h all the plenary powers which the subordi nate authority may have 9 ITA No.5929/Del/2019 Cheslind TextilesLtd.
in the ma tter. There is no good reas on to justify curt ailment of the power of the Appellat e Assistant Commissi oner in entertai ni ng an additional ground raised by the ass essee in seeki ng modification of t he order of ass essment passed by the I ncome-tax Offic er. This Court f urther observed that t here may be s everal factors jus tifyi ng the raising of a new plea in an appeal and each cas e has to be consider ed on its own fac ts . The Appellate Assistant Commissioner must be s ati sfied t hat t he ground raised was bona fide and that the same could not have been raised earlier for good reasons . The A ppellate Assistant C ommis sioner s houl d exercise his discreti on i n permitti ng or not permitti ng the assess ee t o raise an additi onal gr ound in accordance with law and reason. The same observations would apply to a ppeals before the Tribunal also.
7. The view t hat t he Tribunal is confi ned only t o issues arising out of the appeal bef ore the Commissioner of I ncome-tax (Appeals) takes too narrow a view of the powers of the Appellate Tribunal [vide, e.g., C.I.T, v . Anand Prasad (Delhi), C.I.T . v. Karamc handPr emc hand P. Ltd. and C .I.T. v. C ell ulos e Produc ts of India Lt d. . U ndoubt edly, the Tribunal will have the disc retion to allow or not allow a new gr ound to be raised. B ut where the Tribunal is onl y requi red to c onsider a q uestion of law arising from the facts whic h are on rec ord i n the ass essment proc eedi ngs we f ail to s ee why s uch a questi on should not be allowed to be raised when it is necessary to consider tha t questi on in order to correctly ass ess the ta x liability of an assess ee.
8. The r eframed questi on, t heref ore, is ans wered in the affirmative, i.e., the Tribunal has jurisdiction to examine a questi on of law which arises from the f acts as found by t he authorities below and havi ng a bea ri ng on t he tax liability of the assess ee. We rema nd the p roceedi ngs to t he Tribunal f or consideration of the new grounds raised by t he ass es see on the merits ."
8. Respectfully following the above judgment of the Hon'ble Apex Court, the additional grounds taken up by the assessee are hereby admitted.
On merits:
9. Facts relevant to the ad jud ication of the issue are that the assessee filed return of income on 10.09.2012 by treating TUF 10 ITA No.5929/Del/2019 Cheslind TextilesLtd.
subsidy received during the year amounting to Rs.1,42,36,701/- as revenue receipt and paid tax on the same. During the course of assessment proceedings, the assessee based on the jud gment of Hon'b le Apex Court filed application for modification in the computation of income on 04.12.2014 to consider above mentioned TUF subsidy as capital receip t and exclude such sub sidy while calculating taxable income. The AO vide order dated 26.03.2015 disregarded the letter sub mitted by the assessee by stating that the assessee should have filed the revised return for claiming the benefit. The ld. C IT(A) admitted the ad ditional ground and after verifying the claim allowed the appeal of the assessee.
10. TUF subsidy is granted in order to encourage the upgradation of technology and size. So as to meet the global challenges, the Ministry of Textiles, Government of India had launched the Technology Upgradation Fund ('TUF') Scheme which is to upgrade the technology and hence considering the purpose test, the same needs to be treated as capital in nature. The subsidy is g ranted to improve technology upgradation in the context of liberalization of the industry and trade policy in order to improve competitiveness and long term viability . The benefits under the TUF are available for modernization and expansion of existing units and also for setting up of new units in various segments of tex tiles and jute industry. Taking into consideration, the decision of Hon'ble Hig h Court of Punjab & Haryana in the case of C IT Vs. Sham Lal Bansal 200 Taxmann 14, judgment of Hon'ble Jammu & Kashmir High Court in the case Balaji Alloy s Vs. CIT and taking into consideration the judgments of Hon'ble Apex Court in the case of Ponni Sugars & Chemicals Ltd. Vs. C IT 229 ITR 383 and Sahney Steel and Press 11 ITA No.5929/Del/2019 Cheslind TextilesLtd.
Works Ltd. Vs. C IT 228 ITR 253, we hereby hold that the assessee is eligible to treat the same as capital receipt.
11. In the result, the appeal of the Revenue is dismissed. Order Pronounced in the Open Court on 01/06/2022.
Sd/- Sd/-
(Anubhav Sharma) (Dr. B. R. R. Kumar)
Judicial Member Accountant Member
Dated: 01/06/2022
*Subodh Kumar, Sr. PS*
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(Appeals)
5. DR: ITAT
ASSISTANT REGISTRAR