Judgment:
1. This appeal filed by the Revenue is directed against the order passed by the ld. CIT(A) dated 30.06.1998 for the assessment year 1995-96 on the following grounds: 1. For that the CIT(A) erred in law and in facts in deleting the disallowance made under the head subscription.
2. For that the CIT(A) erred in law and in facts in deleting the disallowances made under the head lease rent on leased back assets.
3. Without prejudice to the ground No. 2 above, the CIT(A) is not justified in holding the transaction of sale and lease back assets as genuine and for commercial purpose when these transactions dare nothing but colourable device to avoid payment of tax as envisaged in the Hon'ble Supreme Court' decision in the case of Mc. Dowell & Co. v. CTO 154 ITR 148.
4. For that the CIT(A) eared in law and in facts in deleting the disallowance of Rs. 16,84,002 made under the head foreign travel expenses when the assessee failed to prove that the expenses were incurred wholly and exclusively for the purpose of assessee's business since the documentary evidence of the business transacted was not furnished.
5. For that the CIT(A) erred in law and in facts in deleting the disallowance under the head employer's contributions to P.F. 6. For that the CIT(A) erred in law and in facts in directing to allow depreciation on facts acquired in the assessment year 1988-89 and 100% depreciation on the Vibro Fluid Red Dryer.
7. For that the CIT(A) erred in law and in facts in directing to take the fencing expenses as revenue expenditure when the expenditure was incurred not for repairing or replacement of existing fencing but for new planting.
8. For that the CIT(A) erred in law and in facts in delete the addition under the head fencing when it is not eligible for depreciation @ 100%.
9. For that the CIT(A) erred in law and in facts in directing to compute the amount deductible Under Section 80HHC by applying the ratio of export turnover to total turnover to the composite income i.e. to the income before application of Rule 8(1) to be applied on the balance of income.
10. For that the CIT(A) erred in law and in facts in directing not to deduct commission, brokerage, warehouse expenses and selling expenses from the gross amount of export sale proceeds in determination of "export turnover" for the purpose of calculation of deduction Under Section 80HHC. 11. For that the Commissioner of Income-tax (Appeals) erred in law and in facts in deleting perversity the disallowance of Rs. 4,00,29,421 made under the head brokerage, commission, warehousing charges and selling and other expenses simply on the basis of appellant's submission.
2. At the outset, the Ld. Counsel for the assessee has submitted that Ground Nos. 1 to 10 except Ground No. 9 are covered by the order of this Tribunal dated 02.05.2003 in the assessee's own case for the assessment year 1994-95 in ITA No. 281/Gau./1998. The LA DR did not contest this fact. We, respectfully following the same therefore, uphold the order of the CTT(A) and reject Ground Nos. 1 to 8 and 10 raised by the Revenue.
3. In Ground No. 9, the Revenue has objected to CIT(A)'s direction to allow deduction Under Section 80HHC with reference to composite income derived from growing and manufacture of tea before, application of Rule 8. This Tribunal in its order dated 02.05.2003 in ITA No. 281(Gau)/of 1998 for the assessment year 1994-95 had held that the deduction Under Section 80HHC should be allowed with reference to business income arrived at after application of Rule 8. The jurisdictional Gauhati High Court in its decision reported in 272 ITR 11 however, reversed the said finding & held that in case of business of growing and manufacture of Tea deduction Under Section 80HHC should be allowed with reference to income before the application of Rule 8, Respectfully following the decision of the jurisdictional High Court in 272 ITR 11 we uphold the order of the CIT(A) and dismiss Ground No. 9.
4. In Ground No. 11, the Revenue has objected to deletion of the disallowance made Under Section 40(a)(i) in respect of brokerage, commission, warehousing charges, selling and other expenses, on the ground that the assessee did not deduct tax Under Section 195. The Ld.
D/R submitted that during the relevant year the assessee incurred expenditure of Rs. 4,00,19,421 on selling commission, brokerage and other expenses in relation to it's overseas sales. These payments were made to non-residents and therefore the assessee had obligation to deduct tax Under Section 195 of the Act. No tax was however deducted from the amount paid to non-residents, which resulted in contravention of Section 195 of the Act. Section 40(a)(i) of the IT Act provides that in computing business income deduction will not be allowed in respect of amounts paid to non-residents unless the tax is deducted at source.
As the assessee failed to deduct tax Under Section 195 of the Act the A.O. rightly disallowed the expenditure of Rs. 4,00,19,421 by invoking Section 40(a)(i).
5. The Ld. D.R. further submitted that the assessee's reliance on Article 7 of Double Taxation Avoidance Agreement between UK and India was misplaced because no material was brought on record to prove that the services were rendered outside India. In absence of the material facts, the CIT(A) was no justified in allowing relief by simply accepting assessee's submissions.
6. The Ld. A.R. stated that for sale of tea in European markets through auction and private sale, assessee had appointed selling agents, with prior approval of the Reserve Bank of India, to whom commission, brokerage, warehousing charges and other selling expenses were paid.
The RBI had permitted the foreign agents to deduct their commission, brokerage and other selling expenses from the proceeds realised and remit the net sales realization to India. These documents established that the expenditure was incurred by the assessee far services rendered by foreign agents in respect of sales effected outside India These foreign agents rendered their services out side India from the establishments outside India As per Article 7 of DTAA with UK, business income earned from services rendered outside India was not taxable in India. The assessee therefore, had no liability to deduct tax at source Under Section 195 of the Act. The AR for the assessee then relied on the Circular Nos. 2 3 dated 23.07.1969 and 786 dated 07.02.2000 issued by the CBDT & submitted that in respect of commission and brokerage paid to foreign agents on export sales,no income chargeable to tax accrued in India and therefore no tax was deductible Under Section 195 of the Act. The A/R further submitted that assessee paid commission to same foreign agents without tax deduction in the past also but no disallowance Under Section 40(a)(i) was made. The Dept has also not invoked provisions of Section 40(a)(i) from AY. 1998-99 and onwards in view of the Boards Circular No. 786.
7. We have heard the parties & perused the orders and documents placed in the Paper book. The RBI had approved the agency agreements with overseas agents & had permitted payment of commission on sales conducted in foreign countries. These documents establish that the non-resident agents were appointed for promoting and conducting sale of tea through auction and private sale outside India. We also note that the RBI had approved deduction of commission and brokerage from gross sale proceeds on tea sold and remit only the net proceeds to India The commission, brokerage and other selling expenses were paid to foreign agents for services rendered outside India. On these facts therefore, the question is whether the assessee was liable to deduct tax Under Section 195 of the Act & the failure to deduct such tax should result in disallowance Under Section 40(a)(i) Any person responsible for paying to a nonresident, not being a company or to a foreign company, any interest or any other sum chargeable under the provisions of this Act shall, at the time of credit of sum income or at the time of payment thereof deduct income tax at the rates in force.
Section 195 of the Act casts obligation on an assessee to deduct tax from the payments made to non-residents which is chargeable to tax under the Act. It was therefore necessary for A.O. to establish that commission, brokerage and other selling expenses paid to non-resident agents included an element of income which was chargeable to tax in India.
9. The issue relating to accrual of income in India in respect of foreign agent's commission was examined by the Board in its circularNo.23 dated 23.07.1969 & in para- 4 me Board clarified as follows: 4) Foreign agents of Indian exporters. - A foreign agent of Indian exporter operates in his own country and no part of his income arises in India. His commission is usually remitted directly to him and is, therefore, not received by him or on his behalf in India Such an agent is not liable to income-tax in India on the commission.
10. In circular No. 786 dated 07.02.2000, the Board explained the applicability of Sections 195 read with Section 40(a)(i) in relation to commission paid to foreign agents, as follows.
In the Audit Report for 1997-98 D.P. No 79(I.T.) The Comptroller & 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 Income-tax Act, 1961. It has come to the notice of the Board that a similar view, on the same set of facts has been taken by some Assessing Officers in other charges.
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 23.07.1969 is drawn, where the taxability of "Foreign Agents of Indian Exporters" was considered along with 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 Na.23 shall 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 &. Auditor General have agreed to drop the objection referred to above.
11. The Boards Circular dated 07.02.2000 therefore puts the controversy to an end. The asseasee paid selling commission, brokerage & other related charges to its nonresident agents in respect of sale of tea outside India. As per the Board circular No. 786 (Supra) no income accrued or arose in India either Under Section 5(2) or Section 9 of the I.T. Act, 1961 and no tax was therefore deductible Under Section 195.
Consequently expenditure on commission and related charges payable to non-resident agents could not be disallowed Under Section 40(a)(i) of the Act on the ground that tax was not deducted. For the reasons discussed above, we do not find any infirmity in the order of the CIT(A) and dismiss Ground No. 11 of the Revenue's appeal.
12. The Cross Objection filed by the assessee is in support of the findings of the CIT(A). As we have upheld the order of the CIT(A), grounds of Cross Objection are now academic in nature and, therefore, do not require adjudication, separately.
In the result, the Revenue's appeal is dismissed and the C.O. is treated as allowed.