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Case Number
Attorney(S)
  • Appellant by Sh. R.S. Singhvi, CA. Sh. Satyajeet Goel, CA
  • Respondent by Ms. Ashima Neb, Sr. DR
Judges
  • N.K. Billaiya, A.M.
  • Suchitra Kamble, J.M.
Acts
  • India u/s 40(a)(ia) of the Income Tax Act, 1961.
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Citation Codes
Equivalent Citations
citation codes
Case Number
Attorney(S)
  • Appellant by Sh. R.S. Singhvi, CA. Sh. Satyajeet Goel, CA
  • Respondent by Ms. Ashima Neb, Sr. DR
Judges
  • N.K. Billaiya, A.M.
  • Suchitra Kamble, J.M.
Acts
  • India u/s 40(a)(ia) of the Income Tax Act, 1961.
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Smart Summary

Summary of Tribunal Opinion: ITA No. 4205/Del/2016 (Pronounced 26.02.2019)

Bench: Judicial Member Suchitra Kamble and Accountant Member N. K. Billaiya. Date of Pronouncement: 26 February 2019. Subject Assessment Year: 2011-12.

Factual and Procedural Background

The appeal was filed by the assessee against the order dated 23/03/2016 passed by the CIT(A)-2, New Delhi in respect of Assessment Year 2011-12. The assessee is a 100% government-owned company under the Department of Scientific and Industrial Research engaged in manufacturing electronic materials, components and systems (including solar photovoltaic cells and railway electronics). The assessee filed its return declaring a taxable income of Rs. 3,10,64,000. The Assessing Officer completed assessment under section 143(3) on total income of Rs. 3,80,52,056 by order dated 18/02/2014 and made additions/disallowances, inter alia, including:

  • Prior period expenses: Rs. 12,80,184
  • Additions under section 40(a)(ia): Rs. 6,82,121 (commission paid to a foreign national)
  • Provisions for non-modeling assets (stock/inventory): Rs. 22,63,734
  • Additional depreciation on AC plant: Rs. 9,60,182
  • Income from other sources: Rs. 18,00,947

The assessee appealed to the CIT(A), which partly allowed the appeal. The assessee filed this appeal before the Tribunal challenging (a) the disallowance under section 40(a)(ia) in relation to commission paid to a non-resident and (b) the rejection of additional depreciation claimed under section 32(1)(iia) in respect of a central air-conditioning plant used in production/testing.

Legal Issues Presented

  1. Whether the Assessing Officer was justified in disallowing Rs. 6,82,121 under section 40(a)(ia) on account of commission paid to a foreign national outside India — i.e., whether tax deduction at source under section 195 was required because the payments were chargeable to tax in India.
  2. Whether additional depreciation under section 32(1)(iia) of the Income Tax Act is allowable in respect of the central air-conditioning plant permanently installed in the production/testing area for axle counters (i.e., whether the AC plant is part of plant and machinery and not office premises).

Arguments of the Parties

Appellant's (Assessee's) Arguments

  • The commission of Rs. 6,82,121 was paid to a non-resident foreign national for procuring export orders abroad; the services were rendered outside India and therefore the payment was not chargeable to tax in India and did not attract TDS under section 195.
  • The assessee relied on CBDT Circular No. 786 dated 07/02/2000 (stating TDS is required only if payment is chargeable to tax in India) and argued that the withdrawal of the Circular in 2009 did not alter the position because section 9 was not changed.
  • The assessee relied on the Supreme Court decision in GE India Technology Centre vs. CIT (327 ITR 456 (SC)) to argue that TDS obligations under section 195(1) arise only if the payment is chargeable to tax in the hands of the non-resident recipient.
  • For additional depreciation, the assessee argued that the central AC plant was integral to production/testing of axle counters (which require temperature control and dust-free environment for RDSO approval), and therefore the proviso to section 32(1)(i) was not applicable and additional depreciation under section 32(1)(iia) should be allowed.
  • The assessee also relied on a Tribunal decision in its own case (ITA No. 207/Del/2014 for AY 2010-11) and on DCIT vs. M/s Bikanerwala Foods Pvt. Ltd. (ITA No. 4139/Del/2014) for the depreciation issue.

Respondent's (Revenue's) Arguments

  • The Department relied upon the assessment order and the order of the CIT(A) in support of the disallowances and rejection of additional depreciation.
  • The Assessing Officer asserted that the CBDT Circular relied upon by the assessee had been withdrawn in 2009 and treated the brokerage/commission as fees for technical services for the purpose of TDS.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
GE India Technology Centre P. Ltd. vs. Commissioner of Income Tax, 2010, 327 ITR 456 (SC) Explains that tax deduction at source obligations under section 195 arise only if the payment is chargeable to tax under the Act. The Tribunal relied on this principle to hold that TDS under section 195 is not attracted where the payment is not chargeable to tax in India; used to support deletion of disallowance under section 40(a)(ia).
Commissioner of Income Tax vs. Eli Lilly and Co. (India) P. Ltd., [2009] 312 ITR 225 (SC) Used together with GE India to support the proposition that if income is not exigible/chargeable to tax in India, TDS under section 195 is not required. Cited by the Tribunal (in combination with GE India) to conclude that payments to third parties with no office or permanent establishment in India are not chargeable and therefore not subject to TDS.
Transmission Corporation of Andhra Pradesh vs. CIT, 1999, 239 ITR 587 (SC) Holds that when a sum or payment is chargeable to tax under the Act, TDS must be deducted on the gross amount; applies when the payment is chargeable. The Tribunal distinguished Transmission Corporation, holding it applies only where the sum is chargeable to tax; since the commission here was not chargeable in India, that decision was held not to apply.
Angelique International Ltd. (High Court decision referenced) Interpreted CBDT Circulars and case law to hold that payments to third parties with no office/PE in India are not chargeable and TDS is not required. The Tribunal referenced this High Court view (as discussed in a prior Tribunal ruling) in support of deleting the addition under section 40(a)(ia).
EON Technology Pvt. Ltd. (Delhi High Court decision referenced) Discussed relevant provisions and Circulars regarding section 195 and application of Transmission Corporation; affirmed the distinction that TDS is not required where payment is not chargeable. The Tribunal noted that the jurisdictional High Court's reasoning supported the view that Transmission Corporation does not apply where the payment is not chargeable to tax.
M/s Northern Tannery (Tribunal decision referenced) Held that if a non-resident commission agent procures export orders abroad and has no Indian nexus, the assessee is not required to deduct TDS on the commission paid. The Tribunal considered the facts identical and followed the Northern Tannery decision to hold that no TDS was required and no disallowance under section 40(a)(ia) could be sustained.
DCIT vs. M/s Bikanerwala Foods Pvt. Ltd., ITA No. 4139/Del/2014 (AY 2010-11), order dated 04/05/2018 (Tribunal) Tribunal decision relied upon concerning whether certain installations (like AC plants) are to be treated as part of plant and machinery for the purpose of depreciation. The assessee relied on this decision for the claim of additional depreciation; the Tribunal accepted the argument that the AC plant was integral to production/testing and allowed additional depreciation.
Tribunal decision in assessee's own case — ITA No. 207/Del/2014 dated 24/02/2016 (AY 2010-11) Applied the principle that services rendered outside India by a foreign agent for procuring export orders do not give rise to income chargeable in India and therefore do not attract TDS. The Tribunal followed this directly applicable earlier decision of the assessee's own case and treated the issue as identical for AY 2011-12, allowing Ground No. 1 accordingly.

Court's Reasoning and Analysis

The Tribunal heard the parties and examined the record. Its analysis proceeded in two parts corresponding to the two primary grounds of appeal.

On Ground No. 1 (Disallowance under section 40(a)(ia) / TDS under section 195):

  1. The Tribunal relied on prior decisions — including the assessee's own earlier Tribunal decision (ITA No. 207/Del/2014 for AY 2010-11), High Court and Supreme Court authorities (Eli Lilly and GE India) — to articulate the governing principle that tax withholding obligations under section 195 arise only if the payment is chargeable to tax under the Act.
  2. It noted that money paid to third parties who do not have any office or permanent establishment in India and who render services outside India is not chargeable to tax in India.
  3. The Tribunal examined the facts and found that the foreign commission agent rendered services in a foreign country to procure export orders; no income accrued or arose in India to that non-resident.
  4. It observed that the place where the agreement was signed or where arbitration was to be held was not material; what mattered was where the services were rendered.
  5. Because the Revenue failed to establish any business or professional connection in India between the assessee and the non-resident, the Tribunal concluded that the payment was not chargeable in India and therefore no obligation to deduct TDS under section 195 arose. Consequently, the disallowance under section 40(a)(ia) could not be sustained.

On Ground No. 2 (Additional depreciation under section 32(1)(iia)):

  1. The Tribunal considered the technical and factual evidence concerning axle counters: these are safety devices that undergo multiple tests for RDSO approval and, in production and testing, require controlled temperature and dust-free conditions.
  2. The Tribunal accepted the assessee's submission that the central air-conditioning plant was permanently installed in the production/testing area, served a functional role in enabling the plant/machinery to meet required production/testing standards, and was thus an integral part of the plant and machinery of the axle counters rather than being part of office premises.
  3. Applying this factual finding to the statutory provision, the Tribunal held that the proviso to section 32(1)(i) (which might exclude certain installations treated as part of building/office premises) was not applicable, and additional depreciation under section 32(1)(iia) was therefore allowable.

The Tribunal explicitly followed the reasoning of prior tribunal and court authorities where similar facts and legal questions were considered and resolved in favour of the assessee.

Holding and Implications

Final Holding: The Tribunal allowed the appeal of the assessee. GROUND NO. 1 (disallowance under section 40(a)(ia)) is allowed and GROUND NO. 2 (additional depreciation under section 32(1)(iia)) is allowed. The result recorded by the Tribunal was: "In result, the appeal of the assessee is allowed." The order was pronounced in open court on 26 February 2019.

Implications and Direct Effect:

  • The disallowance of Rs. 6,82,121 under section 40(a)(ia) in respect of commission paid to a foreign national was set aside because the Tribunal concluded that the payment was not chargeable to tax in India and no TDS obligation under section 195 arose.
  • The additional depreciation claim of Rs. 9,60,182 in respect of the central AC plant was allowed as the AC plant was held to be an integral part of plant and machinery used in production/testing of axle counters.
  • The immediate consequence is tax relief to the assessee for the assessment year in question through reversal of the stated additions/disallowances. The opinion does not purport to create a new judicial precedent beyond applying and following existing authorities and earlier tribunal decisions.

Administrative details: Copies were forwarded to the appellant, respondent, CIT, CIT(Appeals) and the DR; dates of dictation and uploading include 19.02.2019 (dictation) and 26.02.2019 (upload).

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    Central Electronics Ltd. v. Acit .

    PER SUCHITRA KAMBLE, JM This appeal is filed by the assessee against the order dated 23/3/2016 passed by CIT (A)-2, New Delhi for Assessment Year 2011-12.

    2. The grounds of appeal are as under:-

    1. That the Ld.CIT(A) erred in law and on facts in confirming the A.O;s action of disallowing Rs.6,82,121/- being the commission paid to Foreign national outside India u/s 40(a)(ia) of the Act by wrongly rejecting the assessees contention.

    2. That the Ld.CIT(A) erred in law and on facts in confirming the A.O;s action of disallowing Rs.9,60,182/- being the additional depreciation claimed on plant u/s 32 (iia) of the Act by wrongly rejecting the assessees contention.

    3. That the Ld.CIT(A) wrongly rejected the assessees submissions filed during assessment proceedings and appeal proceedings in support of the Date of Hearing 18.02.2019 Date of Pronouncement 26.02.2019

    2 ITA No. 4205/Del/2016 claimed deductions.

    3. The assessee is a 100% own Government Company under Department of Scientific and Industrial Research. It has been incorporated for developing and producing various electronic materials, components and sophisticated system for which know-how on a laboratory scale has been generated in the capital CSIR Laboratories. The Company is engaged in the production of Solar Photovoltaic Cells, Modules & Systems, Railway Electronics, Piezo Electro material for Defence and various Government Departments, agencies like DOT, ONGC, MNES etc. The Government has classified company as High Technology Company and national importance. The assessee company filed its return for the Assessment Year 2011-12 declaring taxable income at Rs. 3,10,64,000/- AAA. The Assessing Officer completed the assessment u/s 143(3) on total income of Rs.3,80,52,056/- vide order dated 18/2/2014. The Assessing Officer made the following additions and disallowances to the return income of the assessee:-

    (i) Prior period expenses - Rs. 12,80,184/-

    (ii) Additions u/s 40(a) (ia) - Rs. 6,82,121/-

    (iii)Provisions for non modeling assets (Stock inventory) - Rs. 22,63,734/-

    (iv) Additional depreciation on AC Plant - Rs.9,60,182/-

    (v) Income from other sources - Rs. 18,00,947/-

    4. Being aggrieved by the assessment order, the assessee filed appeal before the CIT (A). The CIT (A) partly allowed the appeal of the assessee.

    5. The Ld. AR submitted that as regards Ground No.1, the Ld. AR submitted that the Assessing Officer wrongly made disallowance of Rs. 6,82,121/- being the commission paid to Foreign national outside India u/s 40(a)(ia) of the Income Tax Act, 1961. The Ld. AR submitted that the assessee remitted the amount of Rs. 6,82,181/- to non tax resident for helping the assessee in operating business order from that country and as such is not

    3 ITA No. 4205/Del/2016 subject to tax u/s 195 of the Act. The non tax resident has no business establishment/connection in India. The assessee is not under any objection to deduct tax from such payment to a non resident foreign agent receiving commissions from the assessee, as no part of this income arose in India. The Ld. AR further relied upon the CBDT Circular No. 786 dated 7/2/2000. The relevant Circular held that deduction of tax at source assessed only if the payment is chargeable to tax in India. Where the non resident agent of a customer operates outside the country and the payment is remitted directly abroad, no part of this income arises in India. Therefore, no tax is deductable u/s 195 of the Act. The Assessing Officer rejected the assessees contention on the ground that the said Circular is withdrawn by the Board in 2009. The Ld. AR submitted that the clarification still prevails in view of the fact that provisions of Section 9 have not undergone any change in this regard. No tax is, therefore, deductable u/s 195 from export commission payable to non- resident. For services rendered outside in India. The Assessing Officer wrongly considered the payment of brokerage as fees for technical services. The Ld. AR relied upon the decision of the Honble Apex Court in case of GE India Technology Centre Vs. CIT(A) 327 ITR 456 (S.C.) wherein it is held that tax deduction at source obligations u/s 195(1) arise only if the payment is chargeable to tax in the hands of nonresident recipients. Therefore, merely because a person has not deducted tax at source from a remittance abroad it cannot be inferred that person making the remittance has committed a failure in discharging tax withholding obligations because such obligations come into existence only when a recipients has a tax liability in India. The Ld. AR also relied upon the decision of the Tribunal in assessees own case being ITA No. 207/Del/2014 dated 24/2/2016 for A.Y. 2010-11.

    6. The Ld. DR relied upon the order of the CIT(A) and assessment order.

    7. We have heard both the parties and perused the material available on record. Tribunal in assessees own case being ITA No. 207/Del/2014 dated

    4 ITA No. 4205/Del/2016 24/2/2016 for A.Y. 2010-11 held as under:- 3.3 We have heard the rival submissions and perused the material on record. The assessee has obtained services of foreign tax residents for getting export order in a foreign country. The services of procuring export orders for the assessee has arose income in the hands of foreign agent. The only issue in dispute is whether those services are liable for tax deduction at source. In the case of Angelique International Ltd. (supra), the Honble High Court after considering the Circulars issued by the CBDT and judgments of various High Courts and Supreme Court, held as under: . In the light of the judgments of the Supreme Court in Commissioner of Income Tax Vs. Eli Lilly and Co. (India) P. Ltd. [2009], 312 ITR 225 (SC) and GE India Technology Centre P. Ltd. Vs. Commissioner of Income Tax [2010] 327 ITR 456 (SC), once the income was not exigible or chargeable to tax, TDS was not required to be deducted. Money paid to the third parties, who did not have any office or permanent establishment in India, was exempt and not chargeable to tax. Thus, on the said payments or income, TDS was not required to be deducted. We also note that the payments in question were made prior to Circular No. 7 of 2009. On this aspect, there is no dispute. We, therefore, no not find any reason to interfere with the order passed by the Tribunal deleting the addition made by the Assessing Officer under Section 40a(i) of the Act. The appeal, being devoid of merit, is dismissed. 3.4 Further, in the case of EON Technology Pvt. Ltd. (supra), the Honble Delhi High Court has discussed all the relevant provisions and Circulars issued by the CBDT and held as under:

    5. The scope and ambit of Section 195 of the Act has been explained by the Supreme Court in GE India Techonology Centre (P) Ltd. vs. CIT (2010)

    327 ITR 456. In the said case the expression "any other sum chargeable under the provisions of the Act" in Section 195 of the Act was elucidated and explained. It was held that if payment is made in respect of the amount which is not chargeable to tax under the provisions of Act, tax at source (TDS, for short) is not liable to be deducted. Decision of Supreme Court in Transmission Corporation of Andhra Pradesh vs. CIT, (1999) 239 ITR 587 (SC), operates and is applicable when the sum or payment is chargeable to tax under the provisions of the Act. In such cases, TDS has to be deducted on the gross amount of payment made and not merely on the taxable income included in the gross amount. The said decision would not apply in case payment is made but the said sum in entirety is not chargeable or exigible to tax under the provisions of the Act. The said distinction has been rightly understood by the

    5 ITA No. 4205/Del/2016 first appellate authority and the ITAT and correctly applied by them. ( emphasis supplied) 3.5 Further in the case of M/s. Northern Tannery (supra), wherein also non-resident was appointed as commission agent for sale of products, the Tribunal held that since the assessee had simply procured export orders through commission agent for which the commission was paid, the assessee was not required to deduct tax at source on the commission paid to the foreign agent. 3.6 In view of the above ratios of the Courts and Tribunal, we are of the view that the tax at source under Section 195 of the Act is deductible only, if the case of the assessee falls under the expression any other sum chargeable under the provisions of the Act. We find from the facts of the case that the foreign commission agent has rendered services in a foreign country for procuring export orders for the assessee and no income accrued or arose to the assessee in India; therefore, no sum is chargeable to tax in India. It is not material that where the agreement was signed or where the place of arbitration was fixed, but what is material is, that where the service were rendered. The Revenue has failed to establish that between the assessee and the non-resident there existed any business or professional connection in India and thus no income accrued or arose to the non-resident in India. Further we find that in the case of the assessee, the entire sum was not chargeable to tax and thus the judgment of the Transmission Corporation of Andhra Pradesh vs. CIT (supra) is not applicable to the facts of the assessee as held by the jurisdictional High Court in the case of EON Technology Pvt. Ltd. (supra). We find that the facts of the case are identical to the facts of the case of M/s. Northern Tannery (supra), therefore, respectfully following the decisions of the Tribunal in said case , we are of the opinion that no tax was required to be deducted on the commission expenditure towards procuring export orders by the assessee. Therefore, we hold that no disallowance can be sustained under Section 40(a)(i) of the Act. Accordingly, this ground of the assessee is allowed. Thus, the issue in the present assessment year is identical to A.Y. 2010-

    11. The Ld. DR could not distinguish the factual aspect of the present case. Therefore, this issue is squarely covered in favour of the assessee. Ground No.

    1 is allowed.

    6 ITA No. 4205/Del/2016

    8. As regards Ground No.2 relating to additional depreciation claimed on plant u/s 32 (iia) of the Act, the Ld. AR submitted that the axle Counters are safety devices and undergo a number of temporary testing for obtaining RDSO approval. For getting the product to meet such requirements, at the time of production also the temperature is controlled and dust free environment is required which has the basic requirement of air conditioned assembly and testing set ups. Dust if not controlled lead to try soldering systems may no longer passed the above tests. The Ld. AR submitted that the assessees claim for additional depreciation u/s 32 (iia) of the Act on the Central AC Plant permanently installed in production area for safety signaling systems of Indian Railway is proper. The Air conditioner is an integral part of bottle plant and machinery. The Ld. AR relied upon the decision of the Tribunal in case of DCIT Vs. M/s Bikanerwala Foods Pvt. Ltd. being ITA No. 4139/Del/2014 A.Y. 2010-

    11 order dated 4/5/2018.

    9. The Ld. DR relied upon the assessment order and the order of the CIT(A).

    10. We have heard both the parties and perused the material available on record. It is pertinent to note here that the axle Counters are safety devices and undergo a number of temporary testing for obtaining RDSO approval. For getting the product to meet such requirements, at the time of production also the temperature is controlled and dust free environment is required which has the basic requirement of air conditioned assembly and testing set ups. Dust if not controlled lead to try soldering systems may no longer passed the above tests. Thus, it is part of plant and machinery of axle counters and not that of office premises. Thus, the proviso to Section 32(1)(i) of the Act will not be applicable in the present case and additional depreciation has to be allowed. Hence Ground No. 2 is allowed.

    7 ITA No. 4205/Del/2016

    11. In result, the appeal of the assessee is allowed. Order pronounced in the Open Court on 26th FEBRUARY, 2019. Sd/- Sd/- (N. K. BILLAIYA) (SUCHITRA KAMBLE) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated: 26/02/2019 R. Naheed * Copy forwarded to:

    1. Appellant

    2. Respondent

    3. CIT

    4. CIT(Appeals)

    5. DR: ITAT ASSISTANT REGISTRAR ITAT NEW DELHI

    8 ITA No. 4205/Del/2016 Date of dictation 19.02.2019 Date on which the typed draft is placed before the dictating Member 19.02.2019 Date on which the typed draft is placed before the Other Member Date on which the approved draft comes to the Sr. PS/PS Date on which the fair order is placed before the Dictating Member for pronouncement Date on which the fair order comes back to the Sr. PS/PS

    26 .02.2019 Date on which the final order is uploaded on the website of ITAT

    26 .02.2019 Date on which the file goes to the Bench Clerk 26 .02.2019 Date on which the file goes to the Head Clerk

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    Comments

    Central Electronics Ltd. v. Acit .
    (Feb 26, 2019)