Madras High Court
Commissioner Of Income Tax-I vs M/S. Tamil Nadu Newsprint And on 5 November, 2024
Author: Anita Sumanth
Bench: Anita Sumanth
2024:MHC:3867
TC(A)No.666 of 2011
IN THE HIGH COURT OF JUDICATURE AT MADRAS
DATED: 05.11.2024
CORAM
THE HONOURABLE DR.JUSTICE ANITA SUMANTH
AND
THE HONOURABLE MR.JUSTICE G. ARUL MURUGAN
T.C.A. No. 666 of 2011
Commissioner of Income Tax-I,
Chennai.
..Appellant
Vs.
M/s. Tamil Nadu Newsprint and
Papers Ltd.,
67, Anna Salai, Guindy,
Chennai – 600 032.
..Respondent
Prayer: Appeal under Section 260A of Income Tax Act, 1961 as against the
order dated 30.06.2011 passed in ITA No. 554/Mds/2011 by the Income Tax
Appellate Tribunal, Madras 'A' Bench.
For Appellant :: Mr.J. Narayanaswamy,
Senior Standing Counsel
For Respondent :: Mr.R. Vijayaraghavan,
for M/s. Subbaraya Aiyar
Padmanabhan
https://www.mhc.tn.gov.in/judis
TC(A)No.666 of 2011
JUDGMENT
(Delivered by Dr. ANITA SUMANTH,J.)
The following three substantial questions of law arise for decision in this
case:
'1. Whether on the facts and in the circumstances of the case,
the Income-tax Appellate Tribunal was right in holding that the
initial assessment year referred to in section 80IA[5] would mean
only the first year of the claim of deduction u/s. 80IA by the
assessee and not the commencement of operation of the eligible
undertaking?
2. Whether on the facts and in the circumstances of the case,
the Income-tax Appellate Tribunal was right in holding that the
unabsorbed depreciation and carried forward losses of the earlier
years which had already been set off against the other income,
could not be notionally carried forward and taken into
consideration for the purpose of computation of deduction u/s.
80IA, in spite of the clear provisions of section 80IA stipulating
that the said undertaking should be considered as only the source
of income of the assessee for the purpose of determining the
eligible profits?
3. Whether on the facts and in the circumstances of the case,
the Income-tax Appellate Tribunal was right in deleting
thedisallowance of agency commission of Rs.13,71,694/- paid to
non-resident without deducting tax at source, u/s. 40[a][i] of the
Act wrongly applying the decision of the Supreme Court in the
case of GE India Technology Pvt. Ltd Vs. CIT [327 ITR 456]
without appreciating Explanation to Section 9[1] introduced with
retrospective effect from 1.6.1976?'
2. Mr.J. Narayanaswamy, learned Senior Standing Counsel for the
appellant/Commissioner of Income Tax and Mr.R. Vijayaraghavan, learned
Senior Counsel for the respondent/Tamil Nadu Newsprint andPapers Limited
agree that the issue arising in the first two substantial questions of law are
covered in favour of the assessee by a judgment of Supreme Court in the case
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of Velayudhaswamy Spinning Mills Ltd V. Assistant Commissioner of Income
Tax(251 CTR 368).
3. Adverting to the third question, the facts are that the
respondent/assessee had remitted commission to agents situated overseas and
had claimed the amount as expenditure under the provisions of the Income-Tax
Act, 1961 ('Act'), in its profit and loss account. Details were called for in
regard to the remittances and the respondent had furnished the requisite details.
4. The commission agents were admittedly stationed abroad and their
services had been engaged for procurement of export orders. There is no
dispute that the rendition of their services was overseas and the remittances had
been made through the Reserve Bank of India directly to the agents abroad.
Hence, it was the case of the assessee that the payments had neither accrued nor
arisen in India and the Act, in relation to deduction of tax at source, would not
apply in such circumstances.
5. The assessee had also relied on Circular No.786 dated 07.02.2000
('Circular') to the effect that there was nil taxability on export commission paid
to non-resident agents rendering services abroad. Incidentally, Circular No.
786 has been withdrawn by Circular No. 7/2009 dated 22.10.2009.
6. The assessing authority proceeded to complete the assessment
effecting a disallowance under Section 40(a)(i) of the Act of the expenditure
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incurred. According to the authority, who places reliance on the judgment of the
Supreme Court in the case of Transmission Corporation of A.P. Ltd. V.
Commissioner of Income Tax [1999] 239 ITR 0587, it was incumbent on an
assessee, who makes remittances overseas, to, without question, deduct tax at
source.
7. In appeal, the first appellate authority, on the admitted facts of the
case, accepted the assessee's submission to the effect that there was no liability
for tax deduction. The order of the first appellate authority was confirmed in
appeal filed at the instance of Revenue. Hence, this appeal under Section 260A
of the Act raising the above questions of law.
8. The facts are admitted to the effect that the commission agents are
situated abroad. The factum of rendition of services abroad is also admitted. It
is also not in question that no payments were made in India and that the
commission was remitted through banking channels directly to the agents.
Circular No. 786 dated 07.02.2000 on which the assessee relies is extracted
below:
SECTION 9 OF THE INCOME-TAX ACT, 1961 – INCOME
DEEMED TO ACCRUE OR ARISE IN INDIA – INCOME
ACCRUING OR ARISING THROUGH OR FROM BUSINESS
CONNECTION IN INDIA – CLARIFICATION REGARDING
TAXABILITY OF EXPORT COMMISSION PAYABLE TO NON-
RESIDENT AGENTS RENDERING SERVICES ABROAD.
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1. In their Audit Report for 1997-98 for 1997-98 [D.P. No. 79
(IT.)] the Comptroller and Auditor General (C & AG) Raised an
objection that the Assessing Officer in computing the profits and
gains of business or profession, in a case in Mumbai charge, had
wrongly allowed a deduction in respect of a payment to a non-
resident where tax had not been deducted at source. The nature of
the payment in this case was export commission and charges
payable for services rendered outside India. In the view of C &
AG the expenditure should have been disallowed in accordance
with the provisions of section 40(a)(i) of the I.T. Act, 1961. It has
come to the notice of the Board that a similar view, on he same set
of facts has been taken by some Assessing Officers in other
charges.
2. The deduction of tax at source under section 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
Circular No. 23 dated 23rd July,1969 is drawn where the taxability
of 'Foreign Agents of Indian Exporters' was considered alongwith
certain other specific situations. It had been clarified then that
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
section 5(2) and section 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 section
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 and Auditor General
have agreed to drop the objection referred to above.'
9. Mr. J. Narayanaswamy, learned Senior Standing Counsel, would
rely on the judgment in the case of Transmission Corporation of A.P. Ltd.
(supra) reiterating that it was incumbent on an assessee to unilaterally and
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unconditionally effect deduction of tax at source on all foreign payments. The
failure to deduct would result in penal consequences, one being the application
of Section 40(a)(i) of the Act as in the instant case.
10. Per contra, the assessee has relied upon the judgment of the
Supreme Court in GE India Technology Centre (P) Ltd V. Commissioner of
Income Tax and Another (327 ITR 0456). In that case, the Supreme Court has
settled the proposition that there is no obligation to deduct tax in respect of
remittances made to non-residents in the event that the payer/deductor was of
the view that the amount was not liable to tax.
11. Needless to state, such liberty would arise only in the absence of an
adjudication/determination of the liability to tax qua that remittance by the
authority concerned. Moreover, if the assessee ventures to unilaterally decide
on the tax liability/or the quantum thereof, in respect of a remittance, it would
be exposing itself to the legal consequences of such judgement/decision. To
clarify, if the decision taken by the assessee not to deduct is seen to be
erroneous in the light of any proceeding where the subject remittance is held to
be taxable, then all penal consequences would stand attracted in respect of the
act of non-deduction.
12. Mr. Narayanaswamy would attempt to distinguish the judgment in
GE India relying specifically on paragraph 11 extracted below:
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'11. Before concluding we may clarify that in the present
case on facts the ITO(TDS) had taken the view that since the sale
of the concerned software, included a license to use the same, the
payment made by appellant(s) to foreign suppliers constituted
“royalty”which was deemed to accrue or arise in India and,
therefore, TAS was liable to be deducted under s. 195(1) of the
Act. The said finding of the ITO (TDS) was upheld by the CIT(A).
However, in second appeal, the Tribunal held that such sum paid
by the appellant(s) to the foreign software supplier was not a
“royalty”and that the same did not give rise to any “income”
taxable in India and, therefore, the appellant(s) was not liable to
deduct TAS. However, the High Court did not go into the merits of
the case and it went straight to conclude that the moment there is
remittance an obligation to deduct TAS arises, which view stands
overruled'.
13. The distinction that he seeks to make is that in that matter, the
authorities had the benefit of the adjudication by the Income Tax Office (TDS),
who had concluded that the remittance was of an amount that constituted
royalty. According to him, it is only in those circumstances that the Court had
come to the conclusion that there was no liability to deduct tax at source. In the
present case, the authorities did not have the benefit of such adjudication.
Hence, and in such circumstances, he would yet again turn to the ratio laid
down in Transmission Corporation of A.P. Ltd.
14. In our considered view, the ratio in the case of Transmission
Corporation of A.P. Ltd is different. In that case, the Court was concerned with
the taxability or otherwise of a composite payment made to a foreign entity. It
was in those circumstances that the Court held that in the case of a composite
payment where it was unclear as to what component of the payment constituted
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income in the hands of the recipient, it was only appropriate for a deductor to
approach the authorities and seek clarity on the taxability of the
remittance/portion thereof, and the applicable rate. The ratio in Transmission
Corporationhas thus to be seen and understood in the context of that factual
matrix only.
15. In the judgment in GE India Technology Centre (P) Ltd, the Court
has clarified the position that as far as tax deduction is concerned, it is the
deductor who would be responsible for making a judicious determination of tax
liability in such circumstances where there has been no such adjudication at the
instance of revenue authorities. In the event, the decision made is proved
incorrect, then legal consequences would follow.
16. In the facts of the present case, Circular No.786 issued by the
Central Board of Direct Taxes, is clear to the effect that export commission
would not be liable to tax. There has admittedly been no determination of tax
made by any other authority holding the recipients of the commission to be
taxable in India. Hence, the determination of taxability made by the assessee,
and the decision to remit without deduction, is, in this case, unimpeachable.
Hence, we see no infirmity in the order of the Income Tax Appellate Authority
having accepted the case of the assessee. The third substantial question of law
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is also answered in favour of the assessee and the tax case (appeal) is
dismissed.
(A.S.M.J.) (G.A.M.J.)
nv 05.11.2024
Index: Yes
Speaking Order
Neutral Citation : Yes
DR. ANITA SUMANTH,J.
AND
G. ARUL MURUGAN,J.
https://www.mhc.tn.gov.in/judis nv
05.11.2024
https://www.mhc.tn.gov.in/judis
