Vishnu Chemicals Ltd., Hyd, Hyderabad vs Assessee

For Assessee : Mr. A.V. Raghuram For Revenue : Mr. P. Somasekhar Reddy

Date of Hearing : 14.07.2015 Date of Pronouncement : 22.07.2015

ORDER

PER P.M. JAGTAP, A.M.

This appeal filed by the assessee is directed against the Order of Ld.CIT-V, Hyderabad dated 27.03.2015, passed under section 263 of the Income Tax Act, 1961.

2. The assessee in the present case is a company which is engaged in the business of manufacturing and marketing of chrome chemicals. The return of income for the year under consideration was filed by it on 01.10.2010 declaring total loss of Rs.1,85,77,915. In the assessment originally completed under section 143(3) on 28.03.2013, the total income of the assessee was determined by the A.O. at Rs.(-)1,74,65,307. The record of 2 ITA.No.496/Hyd/2015 M/s. Vishnu Chemicals Ltd., Hyderabad

the said assessment came to be subsequently examined by the Ld.CIT and on such examination, he was of the opinion that the order passed by the A.O. under section 143(3) suffered from the following error which was prejudicial to the interests of the Revenue.

"Information available on record indicates that the sales commission of Rs.59,40,886/- was paid to the agents outside India and the assessee failed to deduct tax at source as required under the provisions of Section 195 of the I.T. Act. Hence, it is liable to be disallowed u/s.40(a)(ia) of the I.T. Act. As per the recent decision, (18 Taxmann.com 325 (AAR New Delhi) (2012), the AAR in the case of SKI Boilers & Driers (P) Ltd., , has held that income arising on account of commission payable to agents outside India even on sales made outside, is deemed to accrue and arise in India and taxable in view of the provisions of section 5(2)(b) r.w.s.9(1)(i)."

2.1. The Ld.CIT therefore issued a notice under section 263 requiring the assessee to show cause as to why the assessment made by the A.O. under section 143(3) should not be revised on account of the above error. In reply, the following explanation was offered by the assessee.

"At the outset, we respectfully submit that the original assessment proceedings for the A.Y. 2010-11 were completed with proper application of mind keeping in view the provisions of law and judicial pronouncements available at that point of time. We therefore submit that the decision of AAR in the case of SKI Boilers and Driers P. Ltd., (18 Taxman 325 AAR New Delhi) on which you placed reliance for resorting to revision proceedings cannot be applied across the board to all cases as it pertains to certain 3 ITA.No.496/Hyd/2015 M/s. Vishnu Chemicals Ltd., Hyderabad

set of facts relevant to that case only and it is not the law laid down by the Apex Court in the matter.

Be that as it may, we invite your kind attention to the decision of Hyderabad Bench of ITAT in the case of DCIT versus Divi's Laboratories Ltd., (182 ITAT-Hyd-INTL) wherein it was held that commission paid to a foreign agent without deduction of tax for services rendered outside India cannot be disallowed under section 40(a)(ia) of the Income Tax Act, 1961. You may kindly appreciate that section 195 of the Act has to be read along with the charging sections 4, 5 and 9 of the Act. Section 95 of the Act clearly provides that unless the income is chargeable to tax in India, there is no obligation to withhold tax. In order to determine whether income could be deemed to accrue or arise in India, section 9 of the Act is the basis. Further basic conditions under section 9 of the Act with respect to accruing of income in India namely connection with the property in India and control and management invested in India ar~ not satisfied in the present case.

Withdrawal of CBDT Circular No. 23 and 786 do not provide any support to tax department in disallowing such expenditure. The non-resident agent of Indian exporters operates in his own country and no part of his income arises in India and commission is usually routed to him through banking channels in India. Therefore the same is not received by him or on his behalf in India. Accordingly such a foreign agent is not liable to tax in India in view of the Supreme Court decision in the case of CIT versus Toshoku Ltd (125 ITR 525 ). Further the Supreme Court in the case of Ishikawa Jima Harima Heavy Industries Ltd versus DIT (288 ITR 408) held that in order to attract the provisions of section 195 of the Act the services rendered by non-resident should have been rendered in India and also should have been used in India. The twin tests have to be satisfied in order to attract section 195 of the Act. It may be pertinent to note here that after the aforesaid decision of Supreme 4 ITA.No.496/Hyd/2015 M/s. Vishnu Chemicals Ltd., Hyderabad

Court the legislation amended the explanation to section 9 (2) of the Act with retrospective effect. Despite the amendment the Karnataka High Court in the case of Jindal Thermal Power Co Ltd versus DCIT (321 ITR 31) and held that the decision rendered by the Supreme Court in the case of Ishikawa Jima Harima Heavy Industries Ltd versus DIT (288 ITR

408) still remains valid.

Finally, we submit that it is well settled law that the provisions of tax treaty would prevail over the provisions of the Act. Therefore the law relating to withholding of tax under section 195 of the Act has not been changed consequent to withdrawl of earlier circulars on this issue by CBDT and therefore the disallowance of expenditure under section 40(a)(ia) of the Act is not attracted for payments made. to the non-resident agents by the assessee without deduction of tax there on."

2.2. The above explanation offered by the assessee was not found acceptable by the Ld.CIT for the following reasons given in paragraph 6 of his impugned order.

"6. I have gone through the facts of the case, assessment record and submissions of the A.R. on the issue involved. The case was picked up for scrutiny to examine the genuineness of commission expenses claimed. However, it is seen that though during the course of assessment, the A.O. had collected information regarding commission payments made to outside agents, the A.O. failed to enquire into the nature of services rendered by them. The record does not suggest that the A.O. had looked into the aspect of the eligibility of the nature of expenses claimed to come to a conclusion on its allowability under the relevant provisions of the Act. The A.O. has completed the assessment without any verification or basis for arriving at the conclusion that the expenditure claimed by the assessee is allowable under sections 37(1) or not hit by section 195 of the 5 ITA.No.496/Hyd/2015 M/s. Vishnu Chemicals Ltd., Hyderabad

Act. The completion of the assessment in such a manner would render the order to be erroneous. While the contentions of the authorised representative may be persuasive, it is relevant to note that such arguments would have to be considered only after a proper application of mind on the part of the A.O. on whether the allowability or otherwise of a particular expenditure claimed is first decided. In the instant case, the claim of the assessee has been allowed without examining the nature of services rendered, whether the agents are resident agents or foreign agents, whether the foreign agents have any place of business in India, etc. In the absence of such enquiries, the action of the A.O. in completing the assessment after allowing the sales commission expenses is to be concluded as not only erroneous but prejudicial to the interest of the revenue."

2.3. For the reasons given above and relying inter alia, on the decision of Hon'ble Supreme Court in the case of Malabar Industrial Co. Ltd., vs. CIT 243 ITR 83 (SC), he set aside the order dated 28.03.2013 passed by the A.O. under section 143(3) with a direction to the A.O. to re-do the same as per Law after proper examination of the facts and application of appropriate Law. Aggrieved by the order of the Ld.CIT passed under section 263, the assessee has preferred this appeal before the Tribunal.

3. We have heard the arguments of both the sides and also perused the relevant material on record. The Ld. Counsel for the assessee at the outset has submitted that the issue raised in the present case by the Ld.CIT in his impugned order passed under section 263 is squarely covered on merit by the decision of the Coordinate Bench of this Tribunal in the case of Euroflex 6 ITA.No.496/Hyd/2015 M/s. Vishnu Chemicals Ltd., Hyderabad

Transmissions (India) P. Ltd., vs. ACIT, Circle-2(2), Hyderabad ITA.No.1773/Hyd/2014 dated 01.04.2015 wherein a similar issue was decided by the Tribunal in favour of the assessee holding that the provisions of section 195 would not be applicable to the commission payments made by the assessee to non-resident Indians as such income is not chargeable to tax under the provisions of the Act. The learned D.R. on the other hand, has contended that the error as pointed out by the Ld.CIT vide his impugned order is that the A.O. failed to enquire into the nature of services rendered before allowing the claim of the assessee for deduction on account of payment of commission to the non-resident agents. He has contended that this vital aspect was not enquired into by the A.O. as found by the Ld.CIT from the assessment record and therefore, the order of the A.O. was revised by him. He has contended that the issue of allowability of the payment of commission made to non-resident agents thus has not been raised by the Ld.CIT on merit in his impugned order and the decision of the Coordinate Bench of this Tribunal rendered in the case of Euroflex Transmissions (India) P. Ltd., Hyderabad vs. ACIT (supra), deciding the issue on merit has no application in the present case.

4. After considering the rival submissions and perusing the relevant material on record, we find merit in the contention of the learned D.R. It is observed that the assessment made by the A.O. under section 143(3) was 7 ITA.No.496/Hyd/2015 M/s. Vishnu Chemicals Ltd., Hyderabad

held to be erroneous as well as prejudicial to the interest of the revenue by the Ld.CIT on the ground that the issue as to whether tax was deductible by the assessee from the payment of commission made to foreign parties, had not been enquired into by the A.O. As rightly contended by the Ld. CIT/DR, the exact nature of services rendered by the foreign agent was vital in this regard, but the A.O. failed to make any enquiry on this aspect. At the time of hearing before us, the Ld. Counsel for the assessee has failed to bring anything on record to show that any enquiry indeed was made by the A.O. on this aspect. In the absence of any such enquiry made by the A.O. on this vital aspect during the course of assessment proceedings, we find ourselves in agreement with the Ld.CIT that assessment made by the A.O. was erroneous as well as prejudicial to the interest of the Revenue calling for revision under section 263. We, therefore, uphold the impugned order passed by the Ld.CIT under section 263 and dismiss the appeal filed by the assessee.

5. In the result, appeal of the assessee is dismissed.

Order pronounced in the open Court on 22.07.2015.

Sd/- Sd/- (SAKTIJIT DEY) (P.M. JAGTAP) JUDICIAL MEMBER ACOUNTANT MEMBER

Hyderabad, Dated 22nd July, 2015

VBP/- 8 ITA.No.496/Hyd/2015

M/s. Vishnu Chemicals Ltd., Hyderabad

Copy to :

1. M/s. Vishnu Chemicals Ltd., Hyderabad-500082.

C/o. Mr. K. Vasantkumar, Mr. A.V. Raghuram and Mr.P.Vinod, Advocates, 510, Babukhan Estate, Basheerbagh, Hyderabad - 500 001.

2. The DCIT, Circle 3(3), Hyderabad.

3. CIT-V, Hyderabad.

7. Addl. CIT, Range-17, Hyderabad

8. D.R. ITAT 'A' Bench, Hyderabad.

9. Guard File