ACIT - 15(1), MUMBAI v. M/s. MERU IMPEX, MUMBAI

ITA 2101/MUM/2006 | 2002-2003
Pronouncement Date: 18-11-2011 | Result: Partly Allowed

Appeal Details

RSA Number 210119914 RSA 2006
Assessee PAN AAAFM6289K
Bench Mumbai
Appeal Number ITA 2101/MUM/2006
Duration Of Justice 5 year(s) 7 month(s) 14 day(s)
Appellant ACIT - 15(1), MUMBAI
Respondent M/s. MERU IMPEX, MUMBAI
Appeal Type Income Tax Appeal
Pronouncement Date 18-11-2011
Appeal Filed By Department
Order Result Partly Allowed
Bench Allotted L
Tribunal Order Date 18-11-2011
Date Of Final Hearing 09-11-2011
Next Hearing Date 09-11-2011
Assessment Year 2002-2003
Appeal Filed On 04-04-2006
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH L MUMBAI BEFORE SHRI N.V.VASUDEVAN(J.M) & SHRI B.RAMAKOTAIA H (A.M) ITA NO.1285/MUM/2005(A.Y. 2001-02) ITA NO.2101/MUM/2006(A.Y.2002-03) ITA NO.4958/MUM/2006(A.Y.2003-04) ITA NO.3448/MUM/2007(A.Y.2004-05) THE ACIT 15(1) MATRU MANDIR 1 ST FLOOR TARDEO ROAD MUMBAI 07 (APPELLANT) VS. M/S. MERU IMPEX 15 OSMAN MANZIL 1 ST AGIARY LANE MUMBAI 400 003 PAN: AAAFM 6289K (RESPONDENT) APPELLANT BY : SHRI JITENDRA YADAV RESPONDENT BY : SHRI SUBHASH S. SHETTY DATE OF HEARING : 14.11.2011 DATE OF PRONOUNCEMENT : 18.11.2011 ORDER PER N.V.VASUDEVAN J.M ITA NO.1285/MUM/05 IS AN APPEAL BY THE REVENUE AGA INST THE ORDER DATED 3/12/2004 OF CIT(A) 15 MUMBAI RELATING TO AS SESSMENT YEAR 2001-02. ITA NO.2101/M/06 IS AN APPEAL BY THE REVENUE AGAINS T THE ORDER DATED 27/1/2006 OF CIT(A) 15 MUMBAI RELATING TO ASSESSME NT YEAR 2002-03. ITA NO.4958/M/06 IS AN APPEAL BY THE REVENUE AGAINST TH E ORDER DATED 13/7/2006 OF CIT(A) 15 MUMBAI RELATING TO ASSESSME NT YEAR 2003-04. ITA NO.3448/M/2007 IS AN APPEAL BY THE REVENUE AGAINST THE ORDER DATED 7/3/2007 OF CIT(A) 15 MUMBAI RELATING TO ASSESSMEN T YEAR 2004-05. THE COMMON ISSUE THAT ARISES FOR CONSIDERATION IN ALL T HESE APPEALS IS AS TO WHETHER CIT(A) WAS JUSTIFIED IN DELETING THE ADDITI ON MADE BY THE AO IN ALL ITA NO.1285/MUM/2005(A.Y. 2001-02) ITA NO.2101/MUM/2006(A.Y.2002-03) ITA NO.4958/MUM/2006(A.Y.2003-04) ITA NO.3448/MUM/2007(A.Y.2004-05) 2 THESE YEARS DISALLOWING THE CLAIM OF THE ASSESSEE F OR DEDUCTION OF PAYMENT OF COMMISSION MADE TO ONE MR. SURESH BAFNA. 2. WE SHALL FIRST TAKE UP FOR CONSIDERATION THE ASS ESSMENT YEAR 2001-02. THE ASSESSEE IS A PARTNERSHIP FIRM. IT IS ENGAGED IN THE BUSINESS OF MANUFACTURING AND EXPORT OF READYMADE GARMENTS. WH ILE COMPUTING ITS INCOME FROM EXPORT OF READYMADE GARMENTS THE ASSESS EE HAD CLAIMED AS A DEDUCTION A SUM OF RS. 1 64 50 000/- PAID TO ONE M R. SURESH BAFNA WHO IS A NON-RESIDENT. IT WAS THE CLAIM OF THE ASSESSEE T HAT MR. SURESH BAFNA COORDINATED AND REPRESENTED THE ASSESSEE FIRM IN CO NNECTION WITH PROCUREMENT OF GARMENT BY FOREIGN BUYERS IN AMERICA CANADA & MEXICO. IT WAS THE FURTHER THE CLAIM OF THE ASSESSEE THAT IT H AD OBTAINED THE PERMISSION OF THE RBI FOR APPOINTMENT OF MR. SURESH BAFNA FOR THE PURPOSE OF REPRESENTING THE ASSESSEE AS COORDINATOR WITH FOREI GN BUYERS. THE ASSESSEE ALSO SUBMITTED BEFORE THE AO THAT THE PAYMENTS MADE BY THE ASSESSEE TO MR. SURESH BAFNA ARE NOT CHARGEABLE TO TAX UNDER THE IN COME TAX ACT 1961 (THE ACT) BECAUSE THE SERVICES WERE RENDERED BY MR. SURE SH BAFNA IN AMERICA AND THAT NO BUSINESS ACTIVITY WHATSOEVER WAS CARRIED OU T IN INDIA. THE ASSESSEE ALSO RELIED ON ARTICLE 15 OF THE DTAA BETWEEN IND IA AND USA WHICH PROVIDES THAT RESIDENT OF USA AND WHO DERIVES INCOM E FROM PERFORMANCE IN INDIA OF PROFESSIONAL SERVICES OR OTHER INDEPENDENT ACTIVITIES OF THE SIMILAR CHARACTER SHALL BE TAXABLE ONLY IN USA. ACCORDING TO THE ASSESSEE MR. SURESH BAFNA HAD NO FIXED BASE IN INDIA FOR PERFORM ING HIS ACTIVITIES AND DID NOT STAY IN INDIA FOR A PERIOD OR PERIODS AMOUNTING TO OR EXCEEDING IN THE AGGREGATE 90 DAYS DURING THE PREVIOUS YEAR. FOR THE REASONS GIVEN ABOVE THE ASSESSEE SUBMITTED THAT THERE WAS NO NECESSITY TO DEDUCT TAX AT SOURCE BEFORE MAKING PAYMENT TO MR. SURESH BAFNA. 3. IN THE COURSE OF ASSESSMENT PROCEEDING THE ASSES SEE FILED A COPY OF THE AGREEMENT BY WHICH THE ASSESSEE APPOINTED MR. SURES H BAFNA AS AGENT FOR ITA NO.1285/MUM/2005(A.Y. 2001-02) ITA NO.2101/MUM/2006(A.Y.2002-03) ITA NO.4958/MUM/2006(A.Y.2003-04) ITA NO.3448/MUM/2007(A.Y.2004-05) 3 USA CANADA AND SOUTH AMERICA TO MARKET ASSESSEES KNITTED AND WOVEN LINE OF GARMENTS. THE RELEVANT CLAUSE OF AGREEMENT DATED 1/4/2000 ARE AS FOLLOWS:- NOTE: (SB DENOTES SURESH BAFNA AND MI DENOTES MERU IMPEX (THE ASSESSEE). IT IS AGREED THAT SB WILL PROMOTE MIS BUSINESS BY REPRESENTING MIS PRODUCT AT TRADE SHOWS AND DIRECT MARKETING. SB WIL L DEVELOP ALL MARKETING MATERIALS NECESSARY AT ITS EXPENSE. SB WI LL BE RESPONSIBLE FOR ALL TRAVEL AND HOTEL EXPENSES REQUIRED FOR THE PROMOTION OF MLS PRODUCTS. IT IS AGREED THAT MI WILL PROVIDE THE NECESSARY SAM PLES AND QUOTATIONS IN A TIMELY MANNER FOR THE POTENTIAL ORDERS BEING P ROCURED BY SB. IT IS FURTHER AGREED THAT ALL EXPENSES INCURRED IN THE DE VELOPMENT OF SAMPLES WILL BE BORNE BY MI. IT IS AGREED THAT SB WILL MARKET GOODS ON AN EXPERI MENTAL BASIS FOR THE PERIOD OF SIX MONTHS FOR DELIVERIES STARTING FROM A PRIL TO SEPTEMBER 1998. FOR THIS PERIOD NO PAYMENT WILL BE DUE TO SB IF MI WANTS TO DISCONTINUE THE DEAL WITH SB AT THAT POINT. HOWEVER IF MI WANTS TO CONTINUE SB AS THEIR AGENT BEYOND SEPTEMBER 1998 TH EN MI AGREES TO PAY SB THE REMUNERATION FOR THE ENTIRE YEAR AS PER THE PAYMENT TERMS STATED BELOW. IT IS AGREED THAT MI WILL CONDUCT ALL ITS BUSINESS IN THE GEOGRAPHICAL REGION DESCRIBED ABOVE THROUGH SB AND MI WILL KEEP SB FULLY INFORMED OF ANY INFORMATION THE CUSTOMER MAY ACQUIRE DIRECTL Y FROM MI. THIS IS MEANT TO DEEP SB FULLY IN THE INFORMATION LOOP SO A S TO EXPEDITE ALL COMMUNICATIONS. IT IS FURTHER AGREED THAT SB OR HIS COMPANY JAINCO GARMENTS WOULD NOT DEAL WITH ANYBODY ELSE EXCEPT MERU IMPEX FOR IM PORTING GARMENTS INTO USA. IT IS AGREED THAT THE PAYMENT FOR THE ABOVE SERVICE S WILL BE AS FOLLOWS: MI WILL PAY SB US$ 35O 000.0O PER ANNUM FOR THE ABO VE SERVICES PROVIDED SB WILL PAY FOR THE OFFICES EMPLOYEES SAL ARIES TRAVEL COMMUNICATIONS PROMOTIONAL MATERIALS ETC. IN THE U NITED STATES. ITA NO.1285/MUM/2005(A.Y. 2001-02) ITA NO.2101/MUM/2006(A.Y.2002-03) ITA NO.4958/MUM/2006(A.Y.2003-04) ITA NO.3448/MUM/2007(A.Y.2004-05) 4 BASED ON THE SALES ACTIVITIES THIS REMUNERATION M AY ADJUSTED AS NECESSARY. THIS AGREEMENT WILL REMAIN IN EFFECT FOR A PERIOD O F TWO YEARS AND MAY BE RENEWED THEREAFTER SUBJECT TO CONSENT OF BOTH PA RTIES. 4. ACCORDING TO THE AO IN PARA 4 OF THE ABOVE AGREE MENT MAKES A REFERENCE TO THE AGREEMENT BEING ON AN EXPERIMENT AL BASIS FOR SIX MONTHS FROM APRIL TO SEPTEMBER 1998. THIS WAS A CLAUSE WH ICH WAS ORIGINALLY CONTAINED IN THE AGREEMENT DATED 1/9/1997 BETWEEN T HE ASSESSEE AND MR. SURESH BAFNA WHEREBY MR.SURESH BAFNA WAS FIRST APPO INTED IN WRITING AS AGENT OF ASSESSEE FOR MARKETING PRODUCTS ABROAD AN D THIS CLAUSE HAS BEEN MECHANICALLY REPEATED WITHOUT REALIZING THE FACT TH AT THIS CLAUSE WILL NOT BE RELEVANT FOR THE AGREEMENT DATED 1/4/2000. FURTHER THE AO FOUND THAT THERE WAS NO BASIS FOR FIXING COMMISSION OF US $ 3 50 000 TO MR. SURESH BAFNA FOR SALES TARGET TO BE ACHIEVED BY HIM. THE AO THEREFORE CALLED UPON THE ASSESSEE TO FURNISH THE FOLLOWING:- I) NAMES AND ADDRESSES OF THE PARTIES TO WHOM GOODS WERE EXPORTED DURING F.Y. 1997-98 1998-99 & 1999-2000. II EVIDENCE INDICATING THAT THE GOODS EXPORTED TO A MERICA CANADA ETC. DURING THE F.Y.2000-01 WERE PROCURED BY SURESH BAFNA. III) BASIS OF PAYMENT OF COMMISSION OF US$ 3 50 000 /- TO SHRI SURESH BAFNA DURING THE F.Y.2000-01 IV) DETAILS OF EXPENSES INCURRED BY SHRI SURESH BAF NA FOR THE OFFICES EMPLOYEE SALARIES TRAVEL COMMUNICATIONS PROMOTIONAL MATERIALS ETC. IN THE UNITED STATES AND OTHER SALES ACTIVITIES UNDERTAKEN BY HIM. V) RBIS PERMISSION FOR MAINTAINING AN OFFICE IN AMERICA. VI) WHCTHCR SURESH BAFNA IS RELATED TO ANY OF THE PARTNERS OF M/S. MERU IMPEX. ITA NO.1285/MUM/2005(A.Y. 2001-02) ITA NO.2101/MUM/2006(A.Y.2002-03) ITA NO.4958/MUM/2006(A.Y.2003-04) ITA NO.3448/MUM/2007(A.Y.2004-05) 5 5. IN REPLY THE ASSESSEE FIELD A LIST OF PARTIES T O WHOM EXPORTS WERE MADE IN FINANCIAL YEAR 1998-99 1999-2000 AND 1997-98(TH E FIRST WRITTEN AGREEMENT BETWEEN ASSESSEE AND MR. SURESH BAFNA WAS ONLY DATED 1/9/1997). FROM THE LIST SO FURNISHED BY THE ASSES SEE THE AO NOTICED THAT WALLMART STORES INC. USA & WALLMART CANADA INC. WE RE ASSESSEES CLIENTS TO WHOM EXPORTS WERE MADE IN THE FINANCIAL YEAR 199 7-98 EVEN BEFORE THE WRITTEN AGREEMENT DATED 1.9.97 BY WHICH MR. SURESH BAFNA WAS APPOINTED AS AGENT TO REPRESENT THE ASSESSEE BEFORE THE FOREI GN BUYERS. THE AO ALSO NOTICED THAT IN THE APPLICATION MADE BEFORE THE RBI BY THE ASSESSEE FOR APPROVAL OF MR. SURESH BAFNA TO ACT AS ASSESSEES A GENT BEFORE THE FOREIGN BUYERS THE ASSESEE HAD MENTIONED THAT THE AGREEMEN T DATED 1/4/2000 WAS RENEWAL OF THE EARLIER AGREEMENT DATED 1/9/1997. A CCORDING TO THE AO PRIOR TO 1/9/1997 THE ASSESSEE HAD DEALINGS WITH WALLMART STORES INC. ACCORDING TO THE AO THIS SHOWED THAT THE CLAIM OF THE ASSESSE E THAT IT WAS ONLY BECAUSE OF MR. SURESH BAFNAS EFFORTS THAT EXPORT TO WALLMA RT USA AND CANADA INCREASED CANNOT BE TRUE. ACCORDING TO THE AO THE AGREEMENT WAS NOT SIGNED BEFORE A NOTARY. FURTHER MR. SURESH BAFNA WAS DEBA RRED FROM DEALING ON BEHALF OF ANYBODY ELSE EXCEPT THE ASSESSEE FOR IMP ORTING GARMENTS TO USA BUT NO PENAL PROVISION FOR BREACH OF THE AGREEMENT WAS FOUND IN THE AGREEMENT. IN VIEW OF THE ABOVE DISCREPANCIES THE AO WAS OF THE VIEW THAT THE AGREEMENT WAS SHAM AND NOT GENUINE. ACCORDING TO THE AO THE ASSESSEE AS A PERSON MAKING PAYMENTS TO A NON-RESIDENT WOULD HAVE APPROACHED THE AO FOR NIL OR APPROPRIATE RATE OF DEDUCTION OF TAX AT SOURCE UNDER SECTION 195 OF THE ACT. THE ASSESSEE NOT HAVING DONE SO HAD AS SUMED SUBSTANTIAL RISK. ACCORDING TO THE AO THIS CIRCUMSTANCE ALSO SHOWED T HAT THE RELATIONSHIP BETWEEN THE ASSESSEE AND MR. SURESH BAFNA WAS BEYON D BUSINESS RELATIONSHIP. IN THIS REGARD THE AO ALSO POINTED O UT THAT THE PARTNERS OF THE ASSESSEE HAD MADE GIFTS TO CERTAIN PERSONS. THOUGH IT WAS ASSERTED BY THE ITA NO.1285/MUM/2005(A.Y. 2001-02) ITA NO.2101/MUM/2006(A.Y.2002-03) ITA NO.4958/MUM/2006(A.Y.2003-04) ITA NO.3448/MUM/2007(A.Y.2004-05) 6 ASSESSEE THAT THE DONEES WERE NOT RELATED TO MR. SU RESH BAFNA THE AO WAS OF THE VIEW THAT THE ACTIVITIES OF THE ASSESSEE DID NOT APPEAR TO BE BONAFIDE. IN THE AGREEMENT DATED 0 1/04/2000 IN THE PENULTIMA TE PARA IT WAS AGREED THAT THE PAYMENT OF REMUNERATION OF US$ 3 50 000 /- TO SHRI SURESH BAFNA WAS SUBJECT TO THE CONDITION THAT SB WILL PAY FOR THE OFFICES EMPLOYEE SALARIES TRAVEL COMMUNICATIONS PROMOTIONAL MATE RIAL ETC. IN THE UNITED STATES. HENCE THE AO CALLED UPON THE ASSESSEE VIDE LETTER DATED 04/03/2004 DETAILS OF EXPENSES INCURRED BY SB SO AS TO DECIDE THE REASONABLENESS OF COMMISSION OF US$ 3 50 000/- PAYABLE TO HIM. HOWEV ER ASSESSEE DID NOT FURNISH THE SAID INFORMATION STATING THAT THEIR AGR EEMENT WAS NOT BASED ON REIMBURSEMENT OF EXPENSES. ACCORDING TO THE AO THI S STAND OF THE ASSESSEE CANNOT BE ACCEPTED IN VIEW OF THE FACT THAT AS PER THE AGREEMENT THE PAYMENT OF REMUNERATION OF US$ 3 50 000/- WAS SUBJ ECT TO THE CONDITION THAT SB WILL PAY FOR THE ABOVE MENTIONED EXPENSES. THEREFORE THE BASIS FOR PAYMENT OF REMUNERATION OF US$ 3 50 000/- TO SURESH BAFNA WAS NOT PROVED BY THE ASSESSEE AND THE BASIS OF CONDITION LIKE TA RGET OF SALE TO BE FULFILLED BY THE SHRI SURESH BAFHA WAS ABSENT IN THE AGREEMENT D ATED 01/04/2000. 6. APART FROM THE ABOVE THE AO WAS OF THE VIEW THAT EVEN ASSUMING THAT PAYMENT OF REMUNERATION TO MR. SURESH BAFNA WAS GEN UINE IN VIEW OF THE PROVISIONS OF SECTION 40(A)(III) OF THE ACT THE ASS ESSEE OUGHT TO HAVE DEDUCTED TAX AT SOURCE ON THE PAYMENT MADE TO MR. SURESH BAF NA BECAUSE IT WAS IN THE NATURE OF SALARIES AND SINCE THE ASSESSEE HAD N OT DEDUCTED TAX AT SOURCE THE PAYMENT WAS LIABLE TO BE DISALLOWED . FOR ALL THE ABOVE REASONS THE AO DISALLOWED THE CLAIM OF THE ASSESSEE FOR A SUM OF R S. 1 64 50 000/-. 7. BEFORE THE CIT(A) THE ASSESSEE HAD CONTENDED TH AT IN VIEW OF CBDT CIRCULAR NO.786 DATED 7/2/2000 THE PROVISIONS OF SE CTION 195 OF THE ACT ARE NOT APPLICABLE WHERE COMMISSION PAID TO NON-RESIDE NT WERE IN RESPECT OF ITA NO.1285/MUM/2005(A.Y. 2001-02) ITA NO.2101/MUM/2006(A.Y.2002-03) ITA NO.4958/MUM/2006(A.Y.2003-04) ITA NO.3448/MUM/2007(A.Y.2004-05) 7 SERVICES RENDERED OUTSIDE INDIA. IT WAS FURTHER CO NTENDED THAT IN VIEW OF ARTICLE 15 OF THE DTAA BETWEEN INDIA AND USA THE IN COME IN QUESTION WOULD NOT BE CHARGEABLE TO TAX IN INDIA. THE CIT(A) HELD AS FOLLOWS:- (I) THE SERVICES RENDERED BY MR. SURESH BAFNA WERE COVERED BY ARTICLE 15 OF INDO-US DTAA. IN THIS REGARD THE CIT(A) FOUND THAT MR.SURESH BAFNA WAS A RESIDENT OF USA AND HAD NO FIXED BASE I N INDIA. HE HELD THAT THE TERM FIXED BASE IS NOT DEFINED IN T HE INDIA-US TAX TREATY BUT ITS MEANING IS UNDERSTOOD TO BE ANALOGO US TO THAT OF THE TERM PERMANENT ESTABLISHMENT AS DEFINED IN ARTICL E 5. ARTICLE 5(1) OF THE INDIA-US TAX TREATY DEFINES PERMANENT ESTABL ISHMENT (PE) TO MEAN A FIXED PLACE OF BUSINESS THROUGH WHICH THE BUSINESS OF AN ENTERPRISE IS WHOLLY OR PARTLY CARRIED ON. ARTICLE 5(2) OF THE INDIA-US TAX TREATY CONTAINS A LIST OF FIXED PLACES OF BUSIN ESS WHICH WILL CONSTITUTE A PE. THE LIST IS ILLUSTRATIVE AND NOT E XCLUSIVE. THE LIST INCLUDES A PLACE OF MANAGEMENT A BRANCH AN OFFICE A FACTORY A WORKSHOP AND A MINE A QUARRY OR OTHER PLACE OF EXT RACTION OF NATURAL RESOURCES. SINCE MR. SURESH BAFNA RENDERS T HE SERVICES ENTIRELY OUT OF INDIA HE DID NOT HAVE PE OR A FIXED BASE IN INDIA. ACCORDINGLY HE DOES NOT SATISFY THE TEST FOR BEING TAXABLE IN INDIA UNDER ARTICLE 15 OF THE INDIA-US TAX TREATY. (II) SECTION 195 CASTS AN OBLIGATION ON THE PERSON PAYING THE AMOUNT TO DEDUCT TAXES. HOWEVER THE TAXES CAN ONLY BE DEDUCT ED IF THERE IS ANY SUM CHARGEABLE UNDER THE PROVISIONS OF THE I.T. ACT. THE APPELLANT CONCLUDED THAT THE FEES RECEIVED BY MR. S URESH BAFNA IS NEITHER TAXABLE NOR IS IT TAXABLE UNDER THE ACT NOR UNDER THE INDIA- US TAX TREATY. FOR COMING TO THE CONCLUSION THAT THE PAYMENT IN QUESTION IS NOT TAXABLE UNDER THE ACT IN THE HANDS OF SURESH BAFNA THE CIT(A) REFERRED TO CBDT CIRCULAR NO. 786 DATED 7/2/2000 WHEREIN IT HAS BEEN OPINED THAT NO TAX IS DEDUCTIB LE U/S. 195 IN RESPECT OF EXPENDITURE ON EXPORT COMMISSION AND O THER RELATED CHARGES PAYABLE TO A NONRESIDENT FOR SERVICES RENDE RED OUTSIDE INDIA. THE CIT(A) ALSO RELIED ON THE DECISION IN IN D TELESOFT P.LTD. IN RE [20041 267 ITR 725 (AAR) WHEREIN THE AAR RUL ED THAT IN RESPECT OF RETAINER FEE PAID TO A NON-RESIDENT COMP ANY FOR SECURING BUSINESS OUTSIDE INDIA THERE IS NO LIABILITY TO DE DUCT TAX SINCE SUCH INCOME IS NOT CHARGEABLE TO TAX IN INDIA SO A S TO ATTRACT SECTION 195 OF THE ACT. CONSIDERING THE FACT THAT T HERE WAS AN AGREEMENT BETWEEN THE ASSESSEE AND SRI SURESH BAFNA WHICH PROVIDES THAT HE IS APPOINTED AS EXCLUSIVE AGENT FO R UNITED STATES CANADA AND SOUTH AFRICAN MARKET IN RESPECT OF THE K NITTED AND WOVEN LINE OF GARMENTS OF THE ASSESSEE AND THE NECE SSARY PERMISSION FROM RBI HAS ALSO BEEN TAKEN BY THE BANK OF THE ITA NO.1285/MUM/2005(A.Y. 2001-02) ITA NO.2101/MUM/2006(A.Y.2002-03) ITA NO.4958/MUM/2006(A.Y.2003-04) ITA NO.3448/MUM/2007(A.Y.2004-05) 8 ASSESSEE LAXMI VILAS BANK LTD THE PAYMENT OF CO-O RDINATION CHARGES CANNOT BE DISALLOWED. (III) THE CIT(A) ALSO HELD THAT THE AO HAS MERE LY RAISED SOME OBJECTION REGARDING THE AGREEMENT THAT THERE ARE NO CLAUSE CO NTAINING PENAL PROVISION FOR THE BREACH OF CONTRACT AND ITS CONSEQ UENCES. MERELY BECAUSE THERE ARE NO SUCH CLAUSE AND THE AGREEMENT IS NOT SIGNED IN THE PRESENCE OF THE WITNESS THAT IT DOES NOT BEC OMES A SHAM TRANSACTION. IN FACT THE APPELLANT HAD FILED THE D ETAILS OF PARTIES TO WHOM THE GOODS WERE EXPORTED. IT IS NOT THE CASE TH AT THE DETAILS OF THE EXPORT CLAIMED TO HAVE BEEN MADE IS NOT CORRECT . FOR THE REASONS GIVEN ABOVE THE CIT(A) HELD THAT T HE DISALLOWANCE MADE BY THE AO IN RESPECT OF THE COMMISSION PAID TO SRI SUR ESH BAFNA WAS NOT JUSTIFIED. THE AO WAS THEREFORE DIRECTED TO DELET E THE DISALLOWANCE MADE ON THIS ACCOUNT. 8. AGGRIEVED BY THE ORDER OF THE CIT(A) THE REVENUE HAS PREFERRED THE PRESENT APPEAL BEFORE THE TRIBUNAL. 9. THE LD. D.R RELIED ON THE ORDER OF THE AO. IT W AS FURTHER SUBMITTED BY HIM THAT THE AO HAS CALLED FOR SPECIFIC DETAILS REG ARDING EXPENSES INCURRED BY MR. SURESH BAFNA FOR EARNING THE COMMISSION BECA USE THE AGREEMENT SPECIFICALLY PROVIDES THAT MR. SURESH BAFNA HAS TO BEAR ALL EXPENSES FOR PROMOTION OF THE ASSESSEES PRODUCT. IT WAS FURTHE R SUBMITTED THAT THE ASSESSEE HAD NOT FILED ANY EVIDENCES TO SHOW THE NA TURE OF SERVICES RENDERED BY MR. SURESH BAFNA FOR WHICH COMMISSION WAS PAID. IT WAS FURTHER SUBMITTED BY HIM THAT ARTICLE 15 OF THE INDO USA DT AA WILL APPLY ONLY TO PROFESSIONAL SERVICES MENTIONED IN ARTICLE 15(2) AN D THE NATURE OF SERVICES RENDERED BY THE ASSESSEE WILL NOT FALL WITHIN THE D ESCRIPTION OF PROFESSIONAL SERVICES MENTIONED THEREIN. HE ALSO RELIED ON THE DECISION OF THE HONBLE DELHI HIGH COURT IN THE CASE OF PRECISION ELECTRONI CS LTD. VS. DCIT (2007) 164 TAXMAN 67(DEL) WHEREIN THE HONBLE DELHI HIGH COURT WAS PLEASED TO HOLD THAT EXPENDITURE ON ACCOUNT OF COMMISSION CANN OT BE ALLOWED AS A ITA NO.1285/MUM/2005(A.Y. 2001-02) ITA NO.2101/MUM/2006(A.Y.2002-03) ITA NO.4958/MUM/2006(A.Y.2003-04) ITA NO.3448/MUM/2007(A.Y.2004-05) 9 DEDUCTION IF THE ASSESSEE DID NOT PROVE THE NATURE OF SERVICES RENDERED FOR WHICH COMMISSION WAS PAID. 10. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT SIMILAR EXPENDITURE IN THE PAST WAS ALLOWED AND IT WAS ONLY IN THE RELEVAN T ASSESSMENT YEAR THAT THE AO HAS DOUBTED THE NATURE OF EXPENSES. IT WAS HIS SUBMISSION THAT IT WAS FOR THE PARTIES TO AN AGREEMENT TO DECIDE THE C OMMISSION TO BE PAID AND THE AO CANNOT SIT IN JUDGMENT OVER THE WISDOM OF BU SINESSMAN. IT WAS HIS SUBMISSION THAT THERE WAS NO OTHER RELATIONSHIP BET WEEN THE ASSESSEE AND MR. SURESH BAFNA EXCEPT THAT OF ACTING AS COMMISSIO N AGENT. FURTHER IT WAS SUBMITTED BY HIM THAT THE EVIDENCE WITH REGARD TO T HE NATURE OF SERVICES RENDERED HAVE ALREADY BEEN FURNISHED BEFORE THE AO IN A.Y 2004-05. IT WAS HIS SUBMISSION THAT THE NECESSARY DOCUMENTS FOR ALL THE ASSESSMENT YEARS IN THESE APPEALS CAN BE FILED BEFORE THE AO FOR VERIFI CATION IF THE TRIBUNAL THINKS IT APPROPRIATE. 11. IN HIS REJOINDER THE LD. D.R SUBMITTED THAT THE ASSESSEE SHOULD NOT BE GIVEN A CHANCE TO GO BACK TO THE AO TO PROVE THE NA TURE OF SERVICES RENDERED. 12. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. THE FOLLOWING ISSUES ARISE FOR OUR CONSIDERATION. (I) WHETHER THE ASSESSEE HAS ESTABLISHED THAT THE C OMMISSION WAS PAID FOR SERVICES RENDERED BY MR. SURESH BAFNA. (II) IF ANSWER TO QUESTION NO.1 ABOVE IS IN THE AFF IRMATIVE THEN WHETHER THE DEDUCTION CLAIMED BY THE ASSESSEE CANNOT BE ALLOWED FOR THE FAILURE OF THE ASSESSEE TO DEDUCT TAX AT SOURCE ON THE PAYMENT MAD E TO MR. SURESH BAFNA. (III) WHETHER THE PAYMENT IN QUESTION IS NOT CHARGE ABLE TO TAX IN INDIA BECAUSE OF THE PROVISION OF ARTICLE-15 OF THE INDO- US DTAA. ITA NO.1285/MUM/2005(A.Y. 2001-02) ITA NO.2101/MUM/2006(A.Y.2002-03) ITA NO.4958/MUM/2006(A.Y.2003-04) ITA NO.3448/MUM/2007(A.Y.2004-05) 10 (IV) WHETHER THE PAYMENT IN QUESTION CAN BE SAID TO BE SALARY WITHIN THE MEANING OF SECTION 40(A)(III) OF THE ACT. 13. AS FAR AS THE QUESTION WHETHER THE PAYMENT OF COMMISSION IS FOR SERVICES RENDERED BY MR. SURESH BAFNA TO THE ASSESS E THE ASSESSEE HAD FILED BEFORE THE AO THE DETAILS OF SALES EFFECTED BY THE ASSESSEE FOR THE PERIOD ENDING 31/3/99 31/3/2000 AND 31/3/2001. THE ASSES SEE ALSO FILED AGREEMENT DATED 1/4/2000 WHEREBY MR. SURESH BAFNA WAS APPOINTED AS AN AGENT TO DEVELOP BUSINESS OF THE ASSESSEE IN US CA NADA AND SOUTH-AMERICA. THE AO HAD SPECIFICALLY CALLED FOR EVIDENCE TO SHOW THAT SALES MADE BY THE ASSESSEE IN AMERICA AND CANADA WERE THROUGH THE EFF ORTS OF MR. SURESH BAFNA. THE ASSESSEE HAD NOT FILED THESE DETAILS. APART FROM THE ABOVE THE AGREEMENT BETWEEN THE ASSESSEE AND MR. SURESH BAFNA SPECIFICALLY PROVIDES THAT MR. SURESH BAFNA HAS TO INCUR MARKETING EXPENS ES ABROAD BESIDES EXPENSES INCURRED IN DEVELOPMENT OF SAMPLES TRAVEL COMMUNICATION AND SALARY EXPENSES. THE AO CALLED FOR THE DETAILS OF ALL THESE EXPENSES INCURRED BY MR. SURESH BAFNA BUT THE ASSESSEE HAD NOT FURNIS HED ANY OF THE DETAILS. THE AO IN THE ORDER OF ASSESSMENT HAS HOWEVER NOT H ELD THAT THE ASSESSEE HAS NOT ESTABLISHED THE NATURE OF SERVICES RENDERED BY MR. SURESH BAFNA FOR WHICH COMMISSION WAS PAID. THE AO ONLY PROCEEDED O N ASSUMPTION THAT THE AGREEMENT WAS A SHAM DOCUMENT. THE AO FURTHER MADE THE DISALLOWANCE FOR THE REASON THAT THE ASSESSEE DID NOT DEDUCT TAX AT SOURCE BY INVOKING THE PROVISIONS OF SECTION 40(A) (III) OF THE ACT. THE CIT(A) HAS ALSO NOT GIVEN ANY FINDING WITH REGARD TO THE NATURE OF SERVICES RENDE RED BY THE ASSESSEE. IN OUR VIEW IT WOULD BE APPROPRIATE TO REMAND THE ISSU E TO THE AO TO ASCERTAIN EXACT NATURE OF SERVICES RENDERED BY MR. SURESH B AFNA FOR WHICH COMMISSION WAS PAID BY THE ASSESSE IN ALL THE ASSE SSMENT YEARS. THE ASSESSEE WILL FILE ALL THE DETAILS AS MAY BE REQUIR ED BY THE AO AND ESTABLISH THAT SERVICES WERE RENDERED BY MR. SURESH BAFNA FOR WHICH COMMISSION WAS ITA NO.1285/MUM/2005(A.Y. 2001-02) ITA NO.2101/MUM/2006(A.Y.2002-03) ITA NO.4958/MUM/2006(A.Y.2003-04) ITA NO.3448/MUM/2007(A.Y.2004-05) 11 PAID. THE AO WILL CONSIDER THE SAME AND DECIDE THE ISSUE IN ACCORDANCE WITH LAW. THIS ISSUE IS DECIDED ACCORDINGLY. 14. AS FAR AS THE QUESTION WHETHER THE AGREEMENT IS SHAM OR NOMINAL WE ARE OF THE VIEW THAT IF THE SERVICES RENDERED ARE E STABLISHED THEN THE ASSESSEE WOULD BE ENTITLED TO CLAIM DEDUCTION ON ACCOUNT OF COMMISSION PAID. THE EXISTENCE OR NON-EXISTENCE OF WRITTEN AGREEMENT WOU LD NOT BE FATAL TO CLAIM DEDUCTION ON ACCOUNT OF EXPENDITURE ON ACCOUNT OF C OMMISSION. WE THEREFORE HOLD THAT THE FINDING OF THE AO WITH REG ARD TO THE AGREEMENT BEING A SHAM DOCUMENT CANNOT BE SUSTAINED AND IN ANY EVEN T THEY ARE IRRELEVANT. 15. AS FAR AS THE QUESTION WHETHER THE PAYMENT IN Q UESTION IS LIABLE TO DEDUCT TAX AT SOURCE ADMITTEDLY THE SERVICES WERE RENDERED BY MR. SURESH BAFNA IN AMERICA I.E. OUTSIDE INDIA. IN VIEW OF C BDT CIRCULAR NO.786 DATED 7/2/2000 EXPORT COMMISSION PAID TO NON-RESIDENT FOR SERVICES RENDERED OUTSIDE INDIA ARE NOT CHARGEABLE TO TAX IN INDIA. THE DECISION OF THE AAR IN THE CASE OF IND TELESOFT PVT. LTD. 267 ITR 725 (A AR) LAYING DOWN THAT FEE PAID TO NON-RESIDENT FOR SECURING BUSINESS OUTSIDE INDIA IS NOT LIABLE TO TAX DEDUCTION AT SOURCE SINCE SUCH INCOME IS NOT CHARG EABLE TO TAX IN INDIA SUPPORTS THE PLEA OF THE ASSESSEE. IN VIEW OF THE ABOVE WE HOLD THAT THERE WAS NO OBLIGATION TO DEDUCT TAX AT SOURCE AND THER EFORE PROVISIONS OF SECTION 195 WERE NOT APPLICABLE. 16. AS FAR AS THE QUESTION OF APPLICABILITY OF ARTI CLE 15 OF INDIA- US DTAA IS CONCERNED WE ARE OF THE VIEW THAT THE DEFINITIO N OF PROFESSIONAL SERVICES AS GIVEN IN ARTICLE 15(2) IS NOT EXHAUSTIVE BUT NEVER THELESS IT CONTEMPLATES EXISTENCE OF PROFESSIONAL SKILL AND PERFORMANCE OF SUCH PROFESSIONAL SKILL FOR WHICH THEY RECEIVE PAYMENTS. THE DETAILS OF PROFES SIONAL SKILLS OF MR. SURESH BAFNA HAS NOT BEEN SET OUT AND WE THEREFORE REMA ND THE MATTER TO THE AO FOR FRESH CONSIDERATION WITH OPPORTUNITY TO THE ASS ESSEE TO ESTABLISH THIS FACT ITA NO.1285/MUM/2005(A.Y. 2001-02) ITA NO.2101/MUM/2006(A.Y.2002-03) ITA NO.4958/MUM/2006(A.Y.2003-04) ITA NO.3448/MUM/2007(A.Y.2004-05) 12 BEFORE THE AO. WE HOWEVER MAKE IT CLEAR THAT THIS ISSUE IS ONLY ACADEMIC BECAUSE THE COMMISSION PAID TO SURESH BAFNA HAS ALR EADY BEEN HELD NOT CHARGEABLE TO TAX BECAUSE OF THE ABSENCE OF FIXED P LACE OF BUSINESS OF SURESH BAFNA IN INDIA. 17. AS FAR AS THE QUESTION WHETHER THE DISALLOWANCE CAN BE MADE U/S. 40(A)(III) OF THE ACT IS CONCERNED WE ARE OF THE V IEW THAT THE PAYMENT IN QUESTION CANNOT BE CONSIDERED AS SALARY AS THERE I S NO RELATIONSHIP OF EMPLOYER EMPLOYEE BETWEEN THE ASSESSEE AND MR. SURE SH BAFNA. WE THEREFORE HOLD THAT THE DISALLOWANCE MADE BY INVOK ING THE PROVISIONS OF SECTION 40(A)(III) OF THE ACT CANNOT BE SUSTAINED. 18. FOR THE REASONS STATED ABOVE WE SET ASIDE THE O RDER OF THE CIT(A) FOR THE LIMITED PURPOSE OF VERIFYING THE NATURE OF SER VICES RENDERED. IF THE NATURE OF SERVICES ARE ESTABLISHED THEN NO DISALLOW ANCE CAN BE MADE BECAUSE THE PAYMENT IS NOT CHARGEABLE TO TAX IN INDIA AT AL L. IN SUCH AN EVENT THE APPLICABILITY OF ARTICLE 15 OF THE INDIA USA DTAA WOULD ALSO NOT BE MATERIAL. THE ISSUE IN ALL THE OTHER ASSESSMENT YE ARS WAS AGREED BY BOTH THE PARTIES BE IDENTICAL THEREFORE SIMILAR DIRECTIONS ARE GIVEN WITH REFERENCE TO THE OTHER ASSESSMENT YEARS ALSO. 19. IN THE RESULT ALL THE APPEALS ARE TREATED AS P ARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON THE 18 TH DAY OF NOV . 2011. SD/- SD/- (B.RAMAKOTAIAH ) (N.V.VASUDEVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI DATED. 18 TH NOV.2011 ITA NO.1285/MUM/2005(A.Y. 2001-02) ITA NO.2101/MUM/2006(A.Y.2002-03) ITA NO.4958/MUM/2006(A.Y.2003-04) ITA NO.3448/MUM/2007(A.Y.2004-05) 13 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3 . THE CIT CITY CONCERNED 4. THE CIT(A)- CONCERNED 5. THE D.RL BENCH. (TRUE COPY) BY ORDER ASST. REGISTRAR I TAT MUMBAI BENCHES MUMBAI. VM. ITA NO.1285/MUM/2005(A.Y. 2001-02) ITA NO.2101/MUM/2006(A.Y.2002-03) ITA NO.4958/MUM/2006(A.Y.2003-04) ITA NO.3448/MUM/2007(A.Y.2004-05) 14 DETAILS DATE INITIALS DESIGNATION 1 DRAFT DICTATED ON 14/11/2011 SR.PS/PS 2 DRAFT PLACED BEFORE AUTHOR 15/11/2011 SR.PS/PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER JM/AM 5. APPROVED DRAFT COMES TO TH E SR.PS/PS SR.PS/PS 6. KEPT FOR PRONOUNCEMENT ON SR.PS/PS 7. FILE SENT TO THE BENCH CLERK SR.PS/PS 8 DATE ON WHICH THE FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER