Euroflex Transmissions (India) ... vs Assessee

Euroflex Transmissions (India) vs. Asst. Commissioner of Income Pvt. Ltd., Hyderabad. Tax Officer, Circle - 2(2), Hyderabad PAN - AAACE 5313K (Appellant) (Respondent)

Assessee by : Shri A.V. Raghu Ram Revenue by : Shri Rajat Mitra

Date of hearing 25-03-2015 Date of pronouncement 01-04-2015

O RDE R

PER SAKTIJIT DEY, J.M.:

This appeal by assessee is directed against the order dated 08/09/2014 of ld. CIT(A)-III, Hyderabad for the AY 2010-11.

2. The solitary issue arising for consideration is related to disallowance of commission payment of Rs. 78,46,489 to foreign agents by applying the provisions of section 40(a)(i).

3. Briefly the facts are, assessee an Indian company is engaged in the business of manufacture and sale of high value technically advanced flexible disc couplings. For the AY under consideration, assessee filed its return of income declaring total income of Rs. 31,95,37,980. During the assessment proceeding, AO while verifying the financial statements, noticed that assessee has claimed 2 ITA No. 1773 /Hyd/2014 Euroflex Transmission (India) Pvt. Ltd.

expenditure towards commission payment to some foreign agents as under:

i) M/s Coupling International Ltd., U.K. 68,50,599

ii) M/s Magneto Eletropneumaticos Ltd., Brazil 2,75,250

iii) M/s Thermo Dynamics Engineering Co.Ltd., Japan. 7,20,640 Total 78,46,489 ========

He further noticed that on such payments made assessee has not deducted tax at source in terms with section 195 of the IT Act. When AO called upon assessee to explain the reason for not deducting tax on commission payments, assessee stated that foreign commission agents appointed for procuring orders on behalf of assessee have been from various places overseas and they are executing consignments to company's international customer against orders.

Assessee submitted that all the agents are non-residents and they are operating their business activities outside India. It was submitted, commission payment is also towards services provided outside India. Assessee submitted that none of the commission agents have any permanent establishment or permanent business place in India. It was also submitted that the commission amount was remitted to the agents directly outside India. Thus, it was submitted, provisions of section 195 would not be applicable to such payments. AO, however, did not find merit in the submissions of assessee. He was of the view that as per section 195(1) of the Act, assessee was required to deduct tax at source on commission payments to even non-residents. AO, in this context, relied upon the decisions of Authority of Advanced Rulings (AAR) in case of SKF Boilers and Driers Pvt. Ltd. (AAR No. 983-984 of 2010, 22 nd February 2012) and in case of Rajive Malhotra, 284 ITR 564 wherein it was observed that expression accrue or arise occurring in section 5 of the Act would mean income is said to accrue or arise when the right to receive it comes into existence. Therefore, commission paid to non-resident agents would be deemed to accrue or arise in India. Accordingly, AO applying the 3 ITA No. 1773 /Hyd/2014 Euroflex Transmission (India) Pvt. Ltd.

provisions of section 40(a)(i) disallowed the commission payment of Rs. 78,46,489. Being aggrieved, assessee preferred appeal before ld. CIT(A).

4. Ld. CIT(A), however, sustained the disallowance by holding as under:

"6. I have carefully gone through the facts and issues and considered the various aspects brought forth by the appellant. The appellant has not distinguished the specific details brought out in the assessment order and has merely stated that section 195 is not applicable and hence, consequently section 40(a)(ia) was not applicable. I do not find force in the appellant's contention. The assessment order has brought out the facts and the relevant case law i.e., SKF Boilers & Driers Pvt. Ltd., (AAR No. 983-984 of 2010, 22 nd Feb. 2012) and discussed the various facts of the case. I do not find any reason to interfere with the assessment order passed by the AO and the addition made by the AO is upheld."

5. Ld. AR submitted before us, neither AO nor ld. CIT(A) were justified in disallowing the commission payments to non-residents by applying the provisions of section 40(a)(i). It was submitted, when there is no dispute to the fact that the non-residents have provided services overseas and have no business activities as such in India and the payments made were for services provided overseas, then, there is no requirement to deduct tax u/s 195 of the Act. Ld. AR submitted, reliance placed by the departmental authorities on the decisions of AAR is also not correct as those decisions cannot be said to be laying down the correct proposition of law. Ld. AR specifically referring to the decisions of AAR in case of Rajive Malhotra (supra) submitted before us, while coming to its conclusion AAR has completely overlooked the provisions contained under Explanation 1 to section 9(1). Ld. AR submitted that the issue in dispute is more or less covered by not only the decision of the Hon'ble Supreme Court in case of M/s G.E. India Technology Centre Pvt. Ltd., Vs. CIT and another, 327 ITR 456, but, many other decisions of different High Courts as well as ITAT. He submitted, 4 ITA No. 1773 /Hyd/2014 Euroflex Transmission (India) Pvt. Ltd.

though, the decision of Hon'ble Supreme Court and a decision of ITAT, Delhi Bench were cited before ld. CIT(A), but, he completely ignored/overlooked them. In support, he relied upon the following decisions:

1. CIT Vs. Model Exims Kanpur, [2013] 358 ITR 72 (All.)

2. CIT Vs. Faizan Shoes Pvt. Ltd., [2014] 367 ITR 155 (Mad.)

3. CIT Vs. Hyderabad Industries Ltd., 24 SOT 98

4. Indo Court Industries Ltd. Vs. DCIT, ITA NO. 123/Del/2011, dt. 08/07/2011.

5. M/s Aurobindo Pharma Ltd. Vs. Addl. CIT, ITA No. 1096/Hyd/11 and others, order dated, 31/01/2014.

6. Ld. DR, on the other hand, relied upon the assessment order as well as order of CIT(A).

7. We have considered the submissions of the parties and perused the orders of the revenue authorities as well as other materials on record. We have also carefully applied our mind to the decisions cited at the bar. On a perusal of the assessment order, it is very much evident that AO has not disputed the fact that commission payments were made to non-resident agents who not only were carrying on their business activities outside India, but, the commission payments were also related to services provided by those agents outside India. It is also not disputed that none of the commission agents have any permanent establishment or permanent business place in India. AO has also not disputed the fact that commission amounts were remitted to non-residents directly outside India. However, AO has held that assessee is liable to deduct tax u/s 195(1) on the reasoning that as per the decisions of the AAR, referred to by him, income is deemed to accrue or arise in India when right to receive it comes into existence.

Ld. CIT(A) has confirmed the view expressed by AO without assigning 5 ITA No. 1773 /Hyd/2014 Euroflex Transmission (India) Pvt. Ltd.

any reason of his own. It is to be noted that incase of Rajeev Malhotra(supra), AAR has come to its conclusion by referring to the provisions contained u/s 6 and 9 of the IT Act. However, a careful reading of section 9 of the Act would make it clear that under Explanation 1(a) to section 9(1), it has been provided that in case of a business of which all the operations are not carried out in India, the income of such business only relating to such part of the income as is reasonably attributable to the operations carried out in India shall be deemed to accrue or arise in India. In the present case, AO has not brought any material on record to establish that non-resident agents have carried out any part of their business in India.

8. Moreover, section 195(1) envisages that tax is to be deducted at source on income which is chargeable under the provisions of IT Act. The Hon'ble Supreme Court while interpreting the expression 'chargeable under the provisions of this Act' as employed u/s 195(1) of the Act has held in case of GE India Technology Centre P. Ltd. (supra) that the said expression would mean that the remittance has got to be of a trading receipt, the whole or part of which is liable to tax in India. However, if the payments made to non-residents are not chargeable to tax under the provisions of IT Act, then, the provisions of section 195 would not apply. The Hon'ble Supreme Court further observed that if the scope of section 195 is enlarged to that extent, then, it would result in a situation where, even though, the income will have no territorial nexus with India or is not chargeable in India, the Govt. would nonetheless collect taxes. In the present case, on a perusal of the assessment order or the order of ld. CIT(A), we do not find any conclusive finding given by the authorities concerned that the payments made to non-residents are chargeable to tax under the IT Act. Applying the principles laid down by the Hon'ble Supreme Court as aforesaid, it is to be held that the provisions of section 195 would not be applicable to payments made by assessee to non-resident agents. This view is also supported by the following decisions:

6 ITA No. 1773 /Hyd/2014 Euroflex Transmission (India) Pvt. Ltd.

1. CIT Vs. Model Exims Kanpur, [2013] 358 ITR 72 (All.)

2. CIT Vs. Faizan Shoes Pvt. Ltd., [2014] 367 ITR 155 (Mad.)

9. Further, the coordinate bench while examining identical nature of dispute in case of Arobindo Pharma Ltd. (supra) held in the following manner:

25. As far as the amount paid as sales commission is concerned, this issue has already been decided by the Coordinate Bench in assessee's own case for the A.Y. 2002- 2003 and 2004-2005 in ITA.No.415 & 999/Hyd/2007 by order dated 25.06.2010. the Coordinate Bench has held as under :

"2. . . .. . We find that as per Circular 786 dated 17.2.2000, commission paid by the assessee company directly to non-resident agents for rendering services abroad are not liable for deduction of TDS under section 195 of the Act. Accordingly, the provisions of section 40(a)(ia) of the Act are not applicable. The case law relied on by the learned Departmental Representative in the case of Transmission Corporation of A.P. Limited reported in 239 ITR 587 (SC) and the decision of this Tribunal in the case of Cheminor Drugs vs. ITO is not applicable to the facts of the case under consideration, as in this case, the assessee made the payment directly to the non-resident agents for rendering services abroad. In view of the above, we do not see any infirmity in the order of the CIT(A) on this issue and the same is upheld."

10. The ratio laid down by the coordinate bench squarely applies to the facts of the present case. Respecftully following the propositions laid down in the judicial precedents referred to hereinabove, we, therefore, hold that the provisions of section 195 would not be applicable to the commission payments made by assessee to non- resident Indians, as such income is not chargeable to tax under the provisions of the Act. Consequently, disallowance made u/s 40(a)(i) would also not survive. Accordingly, we delete the addition of Rs. 78,46,484 made by AO and sustained by ld. CIT(A).

7 ITA No. 1773 /Hyd/2014 Euroflex Transmission (India) Pvt. Ltd.

11. In the result, appeal of the assessee is allowed.

Pronounced in the open court on 1 st April, 2015.

Sd/- Sd/- (B. RAMAKOTAIAH) (SAKTIJIT DEY) ACCOUNTANT MEMBER JUDICIAL MEMBER

Hyderabad, Dated: 1 st April, 2015 kv

Copy to:-

1) M/s Euroflex Transmissions (India) Pvt. Ltd., C/o M/s Mahesh, Virender & Sriram, CAs, 6-3-788/36 & 37A, Ameerpet, Hyderabad.

2) ACIT, Circle - 2(3),, Hyderabad 3 CIT(A)-III, , Hyderabad

4) CIT-II, Hyderabad

5) The Departmental Representative, I.T.A.T., Hyderabad.