1. These appeals filed by the Revenue arise of the order of the learned CIT(A), Central IV, Mumbai, for the asst. yrs. 1995-96, 1996-97, 1997-98, 1998-99 and 2000-01 and the assessse's appeal for the asst.
yr. 1999-2000 arises out of the order of the CIT(A). All these appeals Involve common disputes, they were heard together and are being disposed of by a common order.
2. Ground Nos. 1 and 4 in the Revenue's appeals for the asst. yrs.
1995-96, 1996-97, 1997-98, 1998-99 and 2000-01 relate to Initiation of the proceedings under Section 147 of the Act by the AO. In all these years action under Section 147 of the Act has been taken for disallowing expenditure of foreign commission payments made to M/s ABC Dubash Shipping Ltd., as under: Admittedly, in all these years the proceedings under Section 147 were taken after expiry of four years from the end of the assessment year in which the income chargeable to tax had allegedly escaped assessment.
The contention of the assessee all along was that there was no failure to file return under Section 139 of the Act or to respond to the notice under Section 142(1) of the Act or to disclose fully and truly all the material facts necessary for the assessment of income for the assessment years in question. The assessee, it may be stated that, filed complete details regarding payment of commission to the AO including the specific details about the nature of services rendered by the agents, copies of invoices raised by them and copies of letters written by the RBI granting approval for the remittances to be made abroad, which were examined by the AO before allowing the assessee's claim for deduction. Therefore, it is claimed that the reassessment proceedings were bad in law and are based on mere change of opinion on the part of the AO. The assessee contended that even in the block assessment order emanating the search operation conducted in the assessee's premises on 2nd Dec, 1999 no addition was made by the AO on account of disallowance of commission although specific queries were raised by him on that issue. The assessee took the plea that the assessment order passed under Section 143(3) merged with the block assessment order and therefore, no reassessment proceedings could be initiated against the original order under Section 143(3) of the Act, as there was no provision for reopening the block assessment order. The AO, however, was of the view that no material was found during the search carried out in the assessee's premises which could prove the recipient rendered any services to the assessee to get a new business abroad. The AO was of the view that in absence of any material evidencing rendering of services would constitute evidence indicating escapement of income and justify the proceedings under Section 147 of the Act.
3. The CIT(A) did not accept the AO's stand and was of the view that the reopening of assessment, according to the proviso to Section 147 of the Act, was bad in law and clearly barred by limitation. He also took a view that proceeding initiated by the AO was a result of change of opinion. He accepted the assessee's plea and the Revenue is in appeal before us.
4. The learned Departmental Representative vehemently supported the findings in the assessment order. He argued that the assessment orders were not time-barred by limitation as the notice under Section 148 was issued in time and the assessments were completed within the prescribed time frame. The learned Departmental Representative also contended that the provisions of Section 147 of the Act were amended w.e.f. 1st April, 1989. According to the learned Departmental Representative, absence of any evidence regarding payment of commission to ABC Dubash Shipping Ltd., in search proceedings took the colour of fresh evidence gathered by the AO and the AO recorded the reasons only after he gathered the fresh evidence. He relied on the decision of the Hon'ble Supreme Court in Phool Chand Bajrang Lal v. ITO (1993) 113 CTR (SC) 436 : (1993) 203 1TR 456 (SC) in support of the Departmental stand.
5. The learned Counsel for the assessee! on the other hand, strongly justified the order of the CIT(A). He pointed out that there was neither failure on the part of the assessee to file the return of income nor there was a failure to disclose all material required by the AO to frame the proper assessment. All the details in respect of the payment of commission have been furnished to the AO. All these payments were genuine payments duly approved by the RBI and the payments were made for the services rendered abroad. For almost 40 years the assessee has been making payments after obtaining necessary approval from the RBI. During the course of search proceedings in the assessee's premises there was no evidence available regarding non-rendering of any services by ABC Dubash Shipping Ltd. The learned Counsel for the assessee further pointed out that reassessments are based on mere change of opinion and in the absence of any fresh material indicating the facts contrary on record.
6. We have carefully considered the rival submissions and also perused the documentary evidences produced by the learned Counsel for the assessee. Let us have a close look of the provisions of Section 147 of the Act, which reads as under: If the AO has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of Sections 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or re-compute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereinafter in this section and in Sections 148 to 153 referred to as the relevant assessment year: Provided that where an assessment under Sub-section (3) of Section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return under Section 139 or in response to a notice issued under Sub-section (1) of Section 142 or Section 148 or to disclose fully and truly all material facts necessary for his assessment for that assessment year.
Explanation 1.--Production before the AO of account books or other evidence from which material evidence could with due diligence have been discovered by the AO will not necessarily amount to disclosure within the meaning of the foregoing proviso.
Explanation 2--For the purpose of this section, the following shall also be deemed to be cases where income chargeable to tax has escaped assessment, namely-- (a) where no return of income has been furnished by the assessee although his total income or the total income of any other person in respect of which he is assessable under this Act during the previous year exceeded the maximum amount which is not chargeable to income-tax.
(b) where a return of income has been furnished by the assessee but no assessment has been made and it is noticed by the AO that the assessee has understated the income or has claimed excessive loss, deduction, allowance or relief in the return; (iii) such income has been made the subject of excessive relief under this Act; or (iv) excessive loss or depreciation allowance or any other allowance under this Act has been computed.
7. Proviso to Section 147 indicates the clear terms that no action can be taken under Section 147 of the Act after the expiry of four years from the end of the relevant assessment year for which an assessment has been made under Section 143(3) of the Act, unless there is a failure on the part of the assessee to file a return under Section 139 or in response to a notice under Section 142(1) or Section 148 of the Act or to disclose fully and truly all material facts necessary for making the assessment. The assessee in this case has been paying commission in the past after obtaining necessary approval from the RBI.The assessee has disclosed full evidences for the payments. All the details relating to these payments have been the subject-matter of total and full disclosure before the AO during the proceedings under Section 143(3) of the Act. There was no material coming to the possession of the AO on the basis of which he could say that there was such a failure on the part of the assessee to disclose fully and truly all material facts necessary for making the assessment. On the basis of the material that was produced before the AO, the AO has accepted the payments. On the basis of the same material, the Revenue is trying to justify the reassessment. It is a clear case of change of opinion and therefore a wrong initiation of the proceedings under Section 148 of the Act.
8. We agree with the reasons given by the CIT(A) and the conclusions arrived at in respect of the disputed issue.
He correctly held that the proceedings under Section 147 was clearly time-barred and illegal. We decline to interfere with his order.
Although reference has been made to several case law on both the sides during the course of proceedings, the decision of the Hon'ble Supreme Court in the case of Indian Oil Corporation v. ITO , which is placed at pp. 111-112 of the assessee's paper book, is more relevant to the facts of this case. The Hon'ble Supreme Court in the aforesaid case observed as under: (i) that the assessee had all along disclosed and the Revenue was aware that London management expenses were incurred on behalf of the assessee by the Burmah Oil Co. who were managing.the affairs and doing certain works for the assessee as well as certain allied companies. The expenses for these allied concerns were on pro rata basis charged by the London office and a certain proportion of the expenses was allocated to different companies and the proportionate amounts were debited and realized from the assessee and allied companies. This fact was known all along to the Revenue while making the original assessments. The nature and quantum of work done was disclosed; whether it was excessive or not was an inferential fact.
The ITO had some doubts as to whether the entirety of the expenses debited were really incurred for the assessee company by the London company or whether that was unreasonable or excessive having regard to the magnitude of the work done by the London company. That was, however, a matter of opinion and an inference drawn from about the work in co-relation to the amount debited. The facts, viz. what was done, what was done, what was being claimed by the London office and the difficulties in producing the accounts or the opinion of the auditors for which the ITO had called the assessee, were all known to the ITO at the time of making the original assessments. In spite of the same, the ITO chose to assess the assessee by allowing the amounts as deductions. The opinion of the auditors for the assessment year 1963-64, that ten per cent would be a reasonable charge might be good information for which the assessments of the assessee could be reopened under Clause (b) of Section 14, but on this basis, although it could not be said that the assessee had failed to disclose fully and truly all basic facts at the time of the original assessments, there was no evidence or allegation that such an opinion was available with the assessee at or before the time of the original assessments. All the basic facts in this case were disclosed : It was, however, not disclosed as to what was the opinion of the author regarding what was reasonable allocation, having regard to the amount of work done on behalf of the assessee company, of the London office expenses. There was no conclusive evidence that at the relevant time, i.e. at the time of filing of the return before the assessments, such auditor's opinion about the reasonableness was there. Secondly, what should be reasonable or not would be an inference of author. The amounts spent, the nature of the work alleged to have been done by Burmah Oil Co. on behalf the assessee and the basis of the allocation had been explained in reply to the queries made by the ITO before the assessment. The ITO had asked at one point of time for the auditor's opinion. It was stated that such opinion could not be supplied. In spite of the same, the ITO did not choose to make a best judgment assessment and did not draw any adverse inference against the assessee. Therefore, it could not be held that there was failure to disclose fully and truly all basic facts. To confer jurisdiction under Clause (a) of Section 147 to reopen an assessment beyond the period of four years but within a period of eight years from the end of the relevant year, two conditions are required to be fulfilled; the first is that the ITO must have reason to believe that the income, profits or gains chargeable to tax had been underassessed or escaped assessment; the second is that he must have reason to believe that such escapement or underassessment was occasioned by reason of the assessee's failure to disclose fully and truly all material facts necessary for the assessment of that year. Both these conditions are conditions precedent to be satisfied.
There must be materials to come to the conclusion that there was 'omission or failure to disclose fully and truly all material facts necessary for the assessment of the year'. This postulates a duty on every assessee to disclose fully and truly all material facts necessary for the assessment. Therefore, the obligation is to disclose facts; secondly, those facts should be material; thirdly, the disclosure must be full and, fourthly, true. What facts are material and necessary for assessment will differ from case to case.
In every assessment proceedings, for computing or determining the proper tax due from the assessee, it is necessary to know all the facts which help the assessing authority in coming to the correct conclusion. From the primary facts in his possession, whether on disclosure by the assessee, or discovered, by him on the basis of the facts disclosed, or otherwise, the assessing authority has to draw inferences as to certain other facts. But, on the primary facts, it is for the taxing authority to draw inferences; it is not necessary for the assessee to draw inferences for him.
9. The other important case law which justifies the order of the CIT(A) is the decision of the Hon'ble Bombay High Court in the case of Cartini India Ltd. v. Asstt. CIT . The facts and the decision in that case can be extracted from the headnote as under: The petitioner was a company engaged in the business of manufacturing and marketing of refrigerators, air-conditioners and washing machines. It filed its return for the asst. yr. 1999-2000 and the AO after considering all materials facts relating to the scrutiny assessment queries, completed the assessment under Section 143(3) of the IT Act, 1961. The order of the AO stated that the Modvat balance of Rs. 3,37,51,671 represented an amount which pertained to the cost of purchase and hence had to be added to the valuation of the closing stock. Being aggrieved by the said order, the petitioner preferred an appeal to the CIT(A). The CIT(A) deleted the addition. On further appeal the Tribunal discussed in detail the issue of Section 145A and held that if Modvat was not included then the AO was to include it without disturbing the opening stock.
Thereafter on 17th March, 2006, the petitioner received a notice dt.
13th March, 2006, under Section 148. Three reasons were recorded for the reopening of the assessment. The reasons were that firstly, the excise duty paid on inventories had not been included in the closing stock. Secondly, fraudulent invoicing by transporters had been wrongly debited to the P&L a/c and set off as bad debts and that thirdly, there was an increase in value of opening stock by applying Section 145A. On a writ petition to quash the notice: Held, that with respect to the valuation of opening stock read with Section 145A, the AO in his order had denied the benefit of increase in the value of opening stock which was further carried in appeal upto the Tribunal stage where the stand of the Department had been accepted. The additions made during the assessment proceedings had been upheld by the Tribunal. Thus, there could not be any failure on the part of the petitioner resulting in escapement of income. As per the new provisions of Section 145A, the unutilized Modvat credit had to be included in the closing stock of raw material and work-in-progress, whereas the excise duty paid on unsold finished goods had to be included in the inventory of finished goods.
Therefore, the decision of the CIT(A) was only related to unutilized Modvat credit. Moreover the respondents had held the notes in the balance sheet of the petitioner to be a full and true disclosure but subsequently chose to alter this view. There was no failure to disclose fully and truly all material facts, and therefore, reopening of the assessment beyond four years from the end of the relevant assessment year could not be sustained.
10. In the light of the same, the order of the CIT(A) for those assessment years on the disputed issue is confirmed.
11. The remaining grounds in the Revenue's appeal in first four years and all the grounds in the appeal for the asst. yr. 2000-01 relate to disallowance of commission paid to foreign agents. It has been contended by the Department that the learned CIT(A) erred in stating that all the 15 correspondences referred by him in p. 7 of the appellate order originated in India and were written by the assessee, the only letter dt. 12th Feb., 1993 from Channel Islands was addressed by ABC Dubash as the director of ABC Dubash Shipping Ltd., (in short "ABC DSL") to the assessee company whose chairman was ABA Dubash himself. It was further contended that all these papers were not found during the search, which meant that these were written on later date to support the commission payments. Before the AO, the assessee took the plea that commission was paid to foreign agents for more than 40 years and that such remittances had been approved by the RBI. The AO further observed that both the assessee company and ABC DSL, were controlled by ABA Dubash and his wife Uma A. Dubash, which meant that the Dubash family paid the commission to themselves without any valid business consideration. It was noted that no documents were found during the course of search of the assessee's premises which could indicate that services were rendered by ABC DSL 12. The AO was also of the view that the approval of the RBI was granted in terms of their Rules and Regulations for such remittances and did not have any bearing on the justification of such payments.
Before the learned CIT(A) the assessee clearly stated that the shares of ABC DSL were owned by Elstar Trust and not ABA Dubash or the members of his family. It was also contended that the payment of commission was approved by the board of directors which included a representative of SCICI, who had given substantial loan to the assessee. The representative of the financial institution would not approve any proposal where payments were made to family members without business consideration as alleged by the AO. The assessee also contended before the learned CIT(A) that the RBI having gone into the matter on merits and having sanctioned the remittances of commission payments, the genuineness of the payments could not be doubted by the AO. According to the assessee, the AO failed to appreciate that the RBI had approved the appointment of ABC DSL as an agent and had reduced the commission payable to them from 11 per cent to 9 per cent. The learned CIT(A) after considering the arguments of the AO and the evidences produced by the assessee, came to the conclusion that the payment of the sum of Rs. 1,41,31,935 as commission to ABC DSL was fully justified in keeping with the exigencies of the assesse's business. According to him, there was ample evidence in the form of correspondences between ABC DSL and the assessee to show that the services were indeed rendered by the said company and that these services had been of substantial benefit to the company. The following observations made by the learned CIT(A) are very important: 13.1.1...the commission which was finally agreed to be paid was only 9 per cent inclusive of out of pocket expenses. This was against the rate of 14 per cent requested for by Skyline Navigation Corporation of USA and Deugro Carl E. Press International Spedition, which would have raised their commission from 5 per cent and 7 per cent which were the rates approved by the RBI, to 14 per cent. The request for hike in the rates was made after the earlier contract with these two agencies had expired on 31st Oct., 1992. The RBI, vide its letter dt. 12th March, 1993 granted approval to the payment of 9 per cent to ABC DSL, subject to the condition that there would be no reimbursement of expenditure under any other head. The approval was subsequently renewed in 1994, 1995, 1996, 1997 and 1998. During all these years, the rate of commission remained at 9 per cent, which was, without doubt, of considerable benefit to the assessee company.
The services rendered were: (b) To retain and maintain relationship and keep existing contracts/jobs for stevedoring; (d) To maintain and handle other public relationship work/activity for and on behalf of the assessee.
As a result of such services, the assessee had been able to obtain much higher rates from its principals such as APL Lines and Hoegh Lines as compared to its competitors. This was during the period 1994-95 to 1999-2000. The assessee has submitted a chart, along with the written submissions, to substantiate this point. Most importantly, the assessee was able to command such rates in spite of severe competition from 14 other stevedores who operate in the Mumbai port.
13. The learned CIT(A) also observed in his order that the conclusion drawn by the AO that firstly, there was no requirement for a foreign agent in assessee's business, and secondly, that no services were rendered by ABC DSL to merit the commission, was not based on the facts of the case. The very fact that it had been able to procure higher rates on lower commission meant that the use of the foreign agents was not only justified but was also an important prerequisite of the assessee's business. As a foreign agent, it was the job of ABC DSL to retain and maintain existing contracts and relationships. Its job was also to realize payments and do liaison work for which commission was paid. Thus, even if Hoegh Lines of Norway had a direct agreement with the assessee and so did Global Container Lines, yet, the role of an agent cannot be denied especially for the purpose of maintaining and sustaining the agreements as well as for negotiating and renegotiating the rates years after year. The AO's observation that the assessee had no business with APL Lines of USA, apparently was not based on facts as is indicated by the written submissions of the assessee according to which the income of the assessee from APL Lines over the years was as under: 14. The learned CIT(A) also noted that the payments made by the assessee to the foreign agent were quite reasonable in the sense that approval had to be taken from the RBI for making the remittances of the commission payments each time a contract was either made or the rates revised. Thus, when M/s Skyline requested in August, 1990 for increase in commission from 5 per cent to 10 per cent on the ground that the rupee had depreciated by almost 50 per cent, the RBI approved the payment of enhanced commission from 5 per cent to only 7.5 per cent.
The increase was allowed only for a period of one year and on the ground that reimbursement of expenditure on postage, telex and cable charges etc., which was earlier made, would no longer be allowed.
Similarly, when the assessee made a proposal for paying commission @ 11 per cent to ABC DSL, the RBI reduced it to only 9 per cent on the condition that no expenditure under any head would be reimbursed.
According to the learned CIT(A) the RBI had diligently applied not only its rules and regulations pertaining to foreign remittances but also to the reasonableness of the payments considering the services rendered by the agents. The decision to appoint ABC DSL as an agent with a commission of 9 per cent was approved not only by the RBI but also by SCICI, which meant that the agreement appointing ABC DSL as an agent, the services rendered by it and the payments/remittances of commission to them, were genuine and in keeping with the exigencies of the assessee's business activity.
15. The learned CIT(A) was very categorical in stating that the AO was mistaken while concluding that the payments made to ABC DSL merely represented the siphoning of funds by ABA Dubash and the members of his family and that both the assessee company and ABC DSL were controlled by ABA Dubash and his wife Uma A. Dubash. In the appellate order it was clearly stated that ABC DSL was not controlled either by ABA Dubash or his wife, Uma A. Dubash, but by a trust known as Elstar Trust, which was settled on 10th April, 1992. The trustees were First Island Trustees (Guernsey) Ltd. This trust was a discretionary trust and owned the entire share capital of GBP 6.7 million in ABC DSL. This was evident from the copy of the letter dt. 25th March, 2003 from First Island Trustees (Guernsey) Ltd., addressed to the assessee company. The letter is signed by one Mr. J.T.B. Pickles, director of the trustee company.
16. The learned Departmental Representative mainly relied on the stand faken by the AO and reiterated that commission payment was without any valid business consideration. It was also stated that the absence of documents in the assessee's premises proved that no services were rendered by ABC DSL. The learned Counsel for the assessee, on the other hand, vehemently argued and supported the findings of the learned CIT(A). According to him, the learned CIT(A) has considered all the facts and circumstances of the case and deleted the addition made by the AO in all the years except asst. yr. 1999-2000. It was pointed out by the learned Counsel for the assessee that the nature of services rendered by the foreign agent was clearly stated in the agreement, which was duly considered by the learned CIT(A). Similarly, the correspondences and other documents were also examined by him. He relied upon the decision of the Hon'ble Supreme Court in the case of S.A. Builders Ltd. v. CIT(A) and Anr. to contend that the AO acted beyond his jurisdiction while questioning the authenticity of the payments.
17. We have heard the rival contentions and carefully gone through the records. In the case of S.A. Builders Ltd. (supra), the Hon'ble Supreme Court has clearly stated that "Once it is established that there was nexus between the expenditure and purpose of the business (which need not necessarily be the business of the assessee itself) the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize his profits". In this case, certain cash loans were claimed to have been taken by the assessee, which were accepted as genuine in the original assessment. Subsequently, there was a confession by the managing director of the creditor company admitting that no cash loan was advanced to any person during the relevant period. It was held by the apex Court that the subsequent information was definite, specific and reliable justifying the validity of the reassessment. In the present case the facts are entirely different and there was no confession and no subsequent information on the basis of which one could validly reopen the completed assessment. The AO also failed to appreciate that the extent of services rendered by the foreign agents could be ascertained from the correspondences exchanged between the two parties and also the increase in the volume of business of the assessee. The role of the foreign agents in the matter of fixation of rates of stevedoring work was also not appreciated by the AO. The AO also ignored the certificate given by Mr. Barry Miller, Vice President of APL Lines Ltd., acknowledging that Mr. A.B.C. Dubash and his other associates, viz. Capt. Surty of ABC DSL, who were marketing and liasoning agents for the assessee negotiated with them in respect of the stevedoring contracts in India since 1993. Similarly, the AO ignored the certificate given by the managing director of Marco Shipping Co. (PTE) Ltd., Singapore confirming that Mr. A.B.C. Dubash and his other associates of ABC DSL were negotiating and liasoning with him in Singapore, UK and USA for stevedoring and other services provided by the assessee in India to Watermen Steamship, USA from 1993.
18. The AO did not give any importance to the fact that the appointment of ABC DSL as the foreign agent was approved by the RBI, and that in that connection, RBI had examined the matter on merits and approved the remittances from time to time. The observation of the Hon'ble Delhi High Court in CIT v. Shriram Pistons & Rings Ltd. (1989) 80 CTR (Del) 159 : (1990) 181 1TR 230 (Del) are very relevant. In that case the remuneration paid to son of a director of a company was approved by the Company Law Board. The AO proceeded to make a disallowance by Section 40A(2) of the Act. It was held that the disallowance cannot be made by the Department on the ground that the same was excessive considering the professional qualification of the employee or lack of it. It was observed by the Court that since the Company Law Board had decided that the remuneration paid to the employee was reasonable, it was not ordinarily open to the' IT authorities to regard such fixation as unreasonable. In another case on the same lines is the decision of the Pune Bench of the Tribunal in Kinetic Honda Motor Ltd. v. Jt. CIT (2001) 72 TTJ (Pune) 72 : (2001) 77 ITD 393 (Pune). In that case the Tribunal Pune Bench observed that "Both the AO and the CIT(A) are not justified in rejecting the Government approval in a light-hearted manner. According to them, the Government of India's approval has no weight as persons granting approval are not expert in income-tax. We would like to refer another decision of the Hon'ble Supreme Court in Union of India v. Azadi Bachao Andolan and Anr. (2003) 184 CTR (SC) 450 : (2003) 263 1TR 706 (SC), wherein it was held that "An act which is otherwise valid in law cannot be treated as non est merely on the basis of some underlying motive supposedly resulting in some economic detriment or prejudice to the national interest, not only is the principle in Duke of Westminister alive and kicking in England but it also seems to have acquired judicial benediction of the Constitutional Bench in India, notwithstanding the temporary turbulence created in the wake of McDowell". The learned CIT(A) in the light of these principles have correctly appreciated the facts of the case and rejected the stand of the AO and has rightly deleted the addition made by the AO. We agree with his findings and uphold his order. Asst. yr. 1999-2000 (Assessee's appeal) 19. While agreeing with the observations of his predecessor on the issues of genuineness and reasonableness of the commission payments to the foreign agent, the learned CIT(A) confirmed the disallowance made by the AO by invoking the provisions of Section 40(a)(i) of the IT Act.
The assessee heavily relied on the CBDT Circular No. 786 dt. 7th Feb., 2000 [(2000) 158 CTR (St) 61], wherein it was clarified that no disallowance had to be made under Section 40(a)(i) of the Act in respect of the payment of the commission to foreign agents, since they operated outside India and no part of their income arose in India. The learned Counsel for the assessee relied on the following authorities:Indopel Garments (P) Ltd. v. Dy. CIT (2001) 72 TTJ (Mad) 702 : (2003) 86 ITD 102 (Mad);Along Auto & General Engineering Co. (P) Ltd. v. Dy. CIT (2005) 97 TTJ (Del) 778;NQA Quality Systems Registrar Ltd. v. Dy. CIT (2005) 92 TTJ (Del) 946; 20. The learned Departmental Representative, on the other hand, fully supported the decision taken by the CIT(A) in the asst. yr. 1999-2000.
21. We have heard the rival submissions and have gone through the records. The question of deduction of payment of tax arises when the payable amount was chargeable to tax in India. Whether the commission paid by the appellant to the foreign agent is chargeable to tax in India in the hands of the recipient has to be examined with reference to the provisions of Section 5 and Section 9 of the Act. According to the provisions of Section 5, the total income of a non-resident includes all income from whatever source derived which (a) is received or is deemed to be received in India, or (b) accrues or arises or is deemed to accrue or arise to him in India. As the recipient company, ABC, DSL is a non-resident, and the commission was paid to them by the appellant outside India for services rendered outside India, neither any income was received or deemed to be received in India by ABC DSL, nor any income accrued or arose to them in India. The Hon'ble Punjab & Haryana High Court held in the case of CIT v. Punjab Tractors Co-operative Multipurpose Society Ltd. (1997) 142 CTR (P&H) 20 : (1997) 95 Taxman 579 (P&H) that in the case of rendering of service income would accrue at the time of such rendering of service. In Indopel Garments (P) Ltd. v. Dy. CIT (supra) the Madras Bench of the Tribunal had the occasion of analyzing the provisions of 40(a)(i) with reference to Section 195 of the Act. The following observations were made by the Tribunal: In a case where there is no chargeable income as clarified by the circular issued by the Board, we do not think it would still be necessary for the assessee to get the concurrence of the AO under Section 195(2). Circulars issued by the Board on the chargeability of the sales commission in the hands of a non-resident were not brought to the notice of the Tribunal. Further the question of apportionment of the income chargeable to tax in the hands of the non-resident under Section 195(2) would arise where there is no dispute about the chargeability as such and the dispute is with regard to the proportion of the sum which is chargeable. It is our considered view that the question of apportionment by the AO under Section 195(2) would not arise in a case where in view of the circular issued by the Board, there is no income chargeable to tax in the hands of the non-resident. The decision in the case of Cheminor Drugs Ltd. (supra) relied on by the learned Departmental Representative is thus not applicable to the facts of the present case, where the assessee's claim regarding non-chargeability to tax is supported by the circulars issued by the Board and the decision of the Supreme Court in Tashoku Ltd.'s case (supra). In the above circumstances, we reverse the finding of the CIT(A) and direct the AO not to disallow under Section 40(a)(i) the sales commission payable to the non-resident. Accordingly this ground of appeal is decided in favour of the assessee.
22. In CIT v. Toshoku Ltd. (supra), the Hon'ble Supreme Court was more specific and eloquent--"That the non-residents did not carry on any business operation in the taxable territories : they acted as selling agents outside India. The receipt in India of the sale proceeds of tobacco remitted or caused to be remitted by the purchases from abroad did not amount to an operation carried out by the non-residents in India as contemplated by Clause (a) of the Explanation to Section 9(1)(i) of the IT Act, 1961. The commission amounts which were earned by the non-residents for services rendered outside India could not be deemed to be income which had either accrued or arisen in India. A credit balance, without more, only represents a debt and a mere book entry in the debtor's own books does not constitute payment which will secure a discharge from the debt". In CIT v. Shri Goverdhan Ltd. and CIT v. Nandram Hunatram , the Hon'ble Supreme Court observed that income may accrue to assessee without actual receipt of the same. If the assessee acquires a right to receive the income, the income can be said to have accrued to him though it may be received later, on its being ascertained. In the instant case, the foreign agent's right to receive the commission is acquired as and when services are rendered. Since services are rendered abroad, the right to receive the commission is consequentially acquired outside India. Accrual of income is also outside India.
23. The case of the foreign agent, ABC DSL, is also not covered by any of the clauses of Section 9 of the Act. Both the AO and the learned CIT(A) contemplated that there was business connection between the appellant and the foreign agent. The appellant company and the foreign company, ABC DSL are two distinct and different entities with two different sets of management. If the provisions of Section 9(1)(i) are analysed carefully, it will transpire that there is no business connection between the two within the meaning of that section. The term 'business connection' has been explained clearly in the case of Blue Star Engineering Co. (Bombay) (P) Ltd. v. CIT . It was held by the Hon'ble Bombay High Court that in order to constitute a 'business connection' there must be an activity of the non-resident in the taxable territories having an intimate and real relation of a continuous character with the business of the non-resident and contributing to the earning of profits by the nonresident in his business. The business connection must undoubtedly be a commercial connection but all commercial connections will not necessarily constitute business connection within the meaning of the concept unless the commercial connection is really and intimately connected with the business activity of non-resident in the taxable territories and is contributory to the earning of profits in the said trading activity.
The term 'business connection' used in the section has not been defined in the Act. However the term has been the subject-matter of interpretation by various Courts. The scope of the expression 'business connection' has been explained by the Hon'ble Supreme Court in CIT v.R.D. Aggarwal & Co. . The expression 'business connection' means something more than a business. It presupposes an element of continuity between the business of the non-resident and the activity in the taxable territory. A stray or isolated transaction is normally not to be regarded as a business connection. Business connection may take several forms; it my include carrying on part of the main business or activity incidental to the non-resident through an agent or it may merely be a relation between the business of the non-resident and the activity in the taxable territory which facilitates or assists the carrying on of that business. A relation to be a 'business connection' must be real and intimate and through or from which income must accrue or arise whether directly or indirectly to the non-resident--Advance Ruling P. No. 8 of 1995, ABC, In re (1996) 136 CTR (AAR) 451 : (1997) 223 ITR 416 (AAR) : (1997) 90 Taxman 47 (AAR). In the present case, the relation between the appellant company and ABC DSL is confined to only rendering of services by the foreign company outside India. There is no intimate connection between the two so as to contribute to the appellant company in the form of commission for the services rendered was wholly and exclusively for its business.
It does not establish any business connection between the two concerns.
The AO contemplated some business connection, but failed to substantiate with any evidence. He also did not clarify under which provision of the Act he came to the conclusion that there was business connection between the two concerns.
24. We would now like to turn to the provisions of Section 195 of the Act to which the learned CIT(A) frequently referred. The responsibility of deducting tax at source from the remittance of the commission to ABC DSL arises only when such commission is taxable in India in the hands of the recipient. As discussed in the previous paras, the income of the recipient in the form of commission received from the appellant company is not chargeable to tax in India. In the case of CIT v. Fertilisers & Chemicals Travancore Ltd. (1990) 86 CTR (Ker) 40 to which our attention was drawn by the learned Counsel for the assessee, the Hon'ble Kerala High Court was of the view that, where question of failure to deduct tax at source under Section 195 is to be decided, the basic question to be considered is whether the foreign collaborator rendered any service in India in terms of the agreement on the basis of which it could be said that a portion out of the payments made to the foreign collaborator is income that accrued to such collaborator in India. In the present case, the foreign agent rendered no service in India.
Therefore, no income accrued or arose in India. The question of deduction of tax at source under Section 195 of the Act thus did not arise. The AO oversimplified the issue by saying that in the matter of deduction of tax it would be immaterial as to whether the payment was made outside India or within India. He overlooked the expression 'any other sum chargeable under the provisions of this Act' embedded in the section. Unless the payment made to a non-resident (not being a company) or a foreign company is chargeable to tax under the provisions of the Act, deduction of tax under Section 195 is totally ruled out.
The matter was clarified by CBDT in some of the instructions issued by them from time to time. Our attention was drawn by the learned Counsel to the following circulars/instructions of CBDT: Non-resident agent operating outside the country--As clarified earlier in Circular No. 23, dt. 23rd July, 1969, where the non-resident agent operates outside the country, no part of his income arises in India, and since the payment is usually remitted directly abroad, it cannot be held to have received by or on behalf of the agent in India. Such payments were therefore, held to be not taxable in India. This clarification still prevails, in view of the fact that the relevant sections [Section 5(2) and Section 9] have not undergone any change in this regard. No tax is therefore deductible under Section 195 from export commission and other related charges payable to such a non-resident for services rendered outside India, and consequently, such payments are allowable as expenditure--Circular No. 786, dt. 7th Feb., 2000 [(2000) 158 CTR (St) 61.
Payments to agents of non-resident shipowners--The provisions of Section 172 are to apply, notwithstanding anything contained in other provisions of the Act. Therefore, in the case of non-resident shipping business, the provisions of Section 195 will not apply. Even where payments are made to shipping agents of non-resident shipowners or charterers for carriage of passengers, etc., shipped at port in India, the agent steps into the shoes of the principal, and hence Section 195 will not apply--Circular No. 723, dt. 19th Sept., 1995 1(1995) 128 CTR (St) 6].
Payments to foreign supplier towards systems software along with hardware--Where a taxpayer, engaged in the business of export of software for computer application, imports any systems software, supplied by the manufacturer of the computer hardware along with the hardware itself, the lump sum payment made to the foreign supplier for acquisition of any right in relation to, or for use of, such systems software will not be liable to tax in India as payment by way of royalty or otherwise. Such lump sum payments will henceforth, be allowed to be made without deduction of tax at source under Section 195(1)--Circular No. 588. dt. 2nd Jan., 1991 [(1991) 187 ITR (St) 63].
25. The AO failed to explain under what circumstances he made the disallowance ignoring the CBDT circulars. All instructions/circulars are issued under Section 119 of the Act. These instructions/circulars are binding on the AOs, as held by the apex Court and different High Courts on different occasions. Some of these decisions are briefly quoted below: Benevolent circulars are binding on Departmental officers. Circulars issued by the Board in order to carry out the assurance given by the Minister in Parliament to provide relief in cases of extreme hardship would be binding on all officers and persons employed in the execution of the Act--Navnit Lal C. Javeri v. K.K. Sen, AAC Circulars issued by the Department are normally meant to be followed and accepted by the authorities--CIT v. Vasudeo V. Dempo .
Even if the directions contained in a circular issued by the CBDT deviate from the provisions of the Act, they are biding on the ITO--Ellerman Lines Ltd. v. CIT Circulars issued by the CBDT are legally binding on the Revenue and this binding character attaches to the circulars even if they are found not in accordance with the correct interpretation of a statutory provision and they depart or deviate from such construction--K.P.Varghese v. ITO 26. It is surprising to note that the learned CIT(A) also did not consider these decisions while analyzing the issues. We are strongly of the view that the learned CIT(A) wrongly interpreted the provisions of Section 40(a)(i) and Section 195 of the Act. In view of the above discussion, we hold that the order of the CIT(A) confirming the addition made by the AO is unjustified and uncalled for. Accordingly the addition is deleted.
27. The next dispute in the assessee's appeal for the asst. yr.
1999-2000 relates to the claim of bad debts written off to the extent of Rs. 12,76,115 in respect of dues of Concord Barges (P) Ltd. The CIT(A) was of the view that the assessee did not file any evidence to show that the barges were supplied by the Concord Barges to the assessee. He was of the view that the assessee only made capital advances to that company. The assessee explained before the learned CIT(A) that it was acting as an agent of Waterman Lines, USA and used to hire barges and tugs for loading and unloading cargo in the midstream if a large vessel could not go alongside the berth. For this purpose, the assessee would from time to time advance money to Concord Barges. The assessee further explained that all its dealings with Concord Barges had stopped after 31st March, 1996 as Waterman Lines took the tugs on hire directly from Concord Barges. Even this also stopped after sometime since Waterman Lines stopped all operations from Bombay Port. The appellant's explanation was, however, not accepted by the learned CIT(A) and the disallowance was sustained.
28. The learned Counsel reiterated the same contentions before us and the learned Departmental Representative strongly justified the disallowance bad debts.
29. We have heard both the sides and perused materials placed on record. There is no dispute that the debt arose in the course of the assessee's normal and regular business transactions. These are parts of the advances made against hiring of barges/tugs from Concord Barges, which became irrecoverable because of the winding up of the debtor's business. The amounts were written off to the P&L a/c during the relevant previous year and there was no chance of recovery of the disputed amount. In our view, such write off are clearly allowable under Section 36(1)(iii) of the Act. We accept the claim of the assessee and delete the disallowance.
30. In the result, the appeal of the assessee is allowed and the Revenue's appeals are dismissed.