Southern borewells P.Ltd, Kollam v. DCIT, Kollam

ITA 415/COCH/2011 | 2007-2008
Pronouncement Date: 29-02-2012 | Result: Allowed

Appeal Details

RSA Number 41521914 RSA 2011
Assessee PAN AAHCS8969A
Bench Cochin
Appeal Number ITA 415/COCH/2011
Duration Of Justice 9 month(s) 6 day(s)
Appellant Southern borewells P.Ltd, Kollam
Respondent DCIT, Kollam
Appeal Type Income Tax Appeal
Pronouncement Date 29-02-2012
Appeal Filed By Assessee
Order Result Allowed
Bench Allotted DB
Tribunal Order Date 29-02-2012
Assessment Year 2007-2008
Appeal Filed On 23-05-2011
Judgment Text
1 ITA NO.415/COCH/2011 IN THE INCOME TAX APPELLATE TRIBUNAL COCHIN BENCH COCHIN BEFORE SHRI N.R.S. GANESAN (JM) AND SHRI B.R. BASKARA N(AM) I.T.A NO. 415/COCH/2011 (ASSESSMENT YEAR 2007-08) M/S SOUTHERN BOREWELLS PVT LTD VS DY.CIT CIR.1 SHASTRI JUNCTION KOLLAM KOLLAM PAN : AAHCS8969A (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI IYPE MATHEW RESPONDENT BY : SMT. VIJAYAPRABHA DATE OF HEARING : 14-02-2012 DATE OF PRONOUNCEMENT : 29-02-2012 O R D E R PER N.R.S. GANESAN (JM) THIS APPEAL OF THE ASSESSEE IS DIRECTED AGAINST TH E ORDER OF THE COMMISSIONER OF INCOME-TAX (APPEALS)-I TRIVANDRUM DA TED 25-03-2011 FOR THE ASSESSMENT YEAR 2007-08. 2. THE FIRST ISSUE ARISES FOR CONSIDERATION IS ASSE SSMENT OF AGENCY COMMISSION PAID TO M/S MOZAMBIQUE HOLDINGS LTD. 3. SHRI IYPE MATHEW THE LD.REPRESENTATIVE FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE COMPANY FILED RETURN OF INCOME DISCLOS ING TOTAL INCOME OF RS. 62 46 320. HOWEVER THE ASSESSING OFFICER DETERMIN ED THE TOTAL INCOME AT 2 ITA NO.415/COCH/2011 RS.4 90 77 670. THE LD.REPRESENTATIVE SUBMITTED TH AT THE ASSESSEE IS MAINTAINING THE BOOKS OF ACCOUNT ON MERCANTILE SYSTEM OF ACCOUNT ING. THE ASSESSEE ENTERED INTO AN AGREEMENT WITH A COMPANY OUTSIDE INDIA FOR THE PURPOSE OF PROVIDING MARKETING SUPPORT TO WIN THE CONTRACT WITH NATIONAL DIRECTORATE OF WATER FOR CONSTRUCTION OF 800 BOREWELLS IN THE PROVINCES OF N AMPULA AND ZAMBEZIA. ACCORDING TO THE LD.REPRESENTATIVE THE FOREIGN COM PANY VIZ. M/S MOZAMBIQUE HOLDINGS LTD HAS NO PERMANENT ESTABLISHMENT IN INDI A. THE CONTRACT WAS AWARDED BY A FOREIGN GOVERNMENT FOR CONSTRUCTION OF 800 BOREWELLS IN THE FOREIGN COUNTRY. AS PER THE AGREEMENT DATED 14-08-20 04 THE COPY OF WHICH IS AVAILABLE AT PAGES 1 TO 3 OF THE PAPER BOOK M/S MO ZAMBIQUE HOLDINGS LTD HAS TO PROVIDE SUPPORT ONLY TO WIN THE CONTRACT FROM THE N ATIONAL DIRECTORATE OF WATER. APART FROM THAT M/S MOZAMBIQUE HOLDINGS LTD IS NOT REQUIRED TO PROVIDE ANYTHING AS PER THE AGREEMENT. FOR THE PURPOSE OF PROVIDING WITH MARKETING SUPPORT TO WIN THE CONTRACT THE ASSESSEE HAS TO PA Y AGENCY COMMISSION @15% ON THE VALUE OF THE CONTRACT. THE LD.REPRESENTATIV E FURTHER SUBMITTED THAT THE AGENCY COMMISSION WAS PAID IN FOREIGN CURRENCY OUTS IDE INDIA THEREFORE NO PART OF INCOME HAS ACCRUED TO M/S MOZAMBIQUE HOLDINGS LT D IN INDIA SO AS TO SUBJECT THE AMOUNT TO TAX IN INDIA. THEREFORE ACCORDING T O THE LD.REPRESENTATIVE THE ASSESSEE IS NOT REQUIRED TO DEDUCT TAX AT THE TIME OF MAKING PAYMENT TO M/S MOZAMBIQUE HOLDINGS LTD. REFERRING TO THE ASSESSME NT ORDER THE LD.REPRESENTATIVE FOR THE ASSESSEE SUBMITTED THAT T HE ASSESSING OFFICER SIMPLY DISALLOWED THE CLAIM OF THE ASSESSEE ON THE GROUND THAT THE ASSESSEE HAS MADE ONLY PROVISION FOR PAYMENT OF THE COMMISSION AND IT WAS NOT PAID. ACCORDING TO THE LD.REPRESENTATIVE SINCE THE ASSESSEE WAS MAINT AINING BOOKS OF ACCOUNT ON MERCANTILE SYSTEM OF ACCOUNTING THE LIABILITY TO P AY THE AMOUNT HAS TO BE ALLOWED AS DEDUCTION WHILE COMPUTING THE TOTAL INCO ME. IN OTHER WORDS ACCORDING TO THE LD.REPRESENTATIVE THE EXPENDITURE RELATING TO PAYMENT OF AGENCY 3 ITA NO.415/COCH/2011 COMMISSION ACCRUED TO THE ASSESSEE DURING THE YEAR UNDER CONSIDERATION THEREFORE IRRESPECTIVE OF THE ACTUAL PAYMENT THE LIABILITY HAS TO BE ALLOWED SINCE THE ASSESSEE IS MAINTAINING THE BOOKS OF ACCOUNT ON MERCANTILE SYSTEM. REFERRING TO THE ACCOUNTING STANDARDS-29 ISSUED BY THE INSTITU TE OF CHARTERED ACCOUNTANTS OF INDIA THE LD.REPRESENTATIVE SUBMITTED THAT ONCE THE BUSINESS LIABILITY HAS DEFINITELY ARISEN IN THE ACCOUNTING YEAR THE DEDUC TION SHOULD BE ALLOWED ALTHOUGH THE LIABILITY MAY HAVE TO BE DISCHARGED AT A FUTURE DATE. THEREFORE THE ASSESSING OFFICER IS NOT JUSTIFIED IN DISALLOWING T HE CLAIM OF THE ASSESSEE ON THE GROUND THAT THE ASSESSEE HAS MADE ONLY PROVISION FO R PAYMENT. 4. THE LD. REPRESENTATIVE FURTHER SUBMITTED THAT ON THE APPEAL BY THE ASSESSEE BEFORE COMMISSIONER OF INCOME-TAX(A) THE C OMMISSIONER OF INCOME- TAX(A) HAS NOT COMMENTED ON THE REASONS ADDUCED BY THE ASSESSING OFFICER FOR DISALLOWANCE. THE COMMISSIONER OF INCOME-TAX(A) FOU ND THAT THE ASSESSEE HAS NOT DEDUCTED TAX AT THE TIME OF PAYMENT U/S 195 OF THE ACT AND THEREFORE HE CONFIRMED THE DISALLOWANCE MADE BY THE ASSESSING OF FICER. REFERRING TO PROVISIONS OF SECTION 195 OF THE INCOME-TAX ACT TH E LD.REPRESENTATIVE FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE WAS EXPECTED T O DEDUCT TAX U/S 195 OF THE INCOME-TAX ACT IN CASE THE AMOUNT PAID / PAYABLE TO THE FOREIGN COMPANY IS TAXABLE UNDER THE INCOME-TAX ACT. IN THIS CASE ACC ORDING TO THE LD.REPRESENTATIVE THE AMOUNT PAID / PAYABLE TO FOR EIGN COMPANY IS NOT TAXABLE IN INDIA. ACCORDING TO THE LD.REPRESENTATIVE THE CON TRACT FOR PROVIDING MARKETING SUPPORT TO WIN THE CONTRACT FOR CONSTRUCTION OF BOR EWELLS IN A FOREIGN COUNTRY THE BOREWELLS HAD TO BE CONSTRUCTED IN A FOREIGN COUNTR Y M/S MOZAMBIQUE HOLDINGS LTD WAS NOT HAVING PERMANENT ESTABLISHMENT IN INDIA AND THE AGENCY COMMISSION PAID / PAYABLE WAS ONLY IN A FOREIGN COUNTRY THERE FORE ACCORDING TO THE LD.REPRESENTATIVE NO PART OF THE AMOUNT PAID / PAY ABLE TO THE FOREIGN COMPANY IS 4 ITA NO.415/COCH/2011 TAXABLE IN INDIA. THEREFORE THE PROVISIONS OF SEC TION 195 OF THE INCOME-TAX ACT ARE NOT APPLICABLE TO THE CASE AT ALL. 5. REFERRING TO THE JUDGMENT OF THE APEX COURT IN T HE CASE OF G.E. TECHNOLOGY CENTRE PVT LTD VS COMMISSIONER OF INCOME-TAX (2010) 327 ITR 457 (SC) THE LD.REPRESENTATIVE SUBMITTED THAT THE EXPRESSION CH ARGEABLE UNDER THE PROVISIONS OF THE ACT IN SECTION 195(1) SHOWS THAT THE REMITTANCE HAS TO BE OF A TRADING RECEIPT THE WHOLE OR PART OF WHICH IS LIAB LE TO TAX IN INDIA. IF TAX IS NOT SO ASSESSABLE THERE IS NO QUESTION OF DEDUCTION OF TAX AT SOURCE. 6. ON THE CONTRARY SMT. VIJAYAPRABHA THE LD.DR SU BMITTED THAT THE ASSESSEE ENTERED INTO AGREEMENT FOR CONSULTANCY SERVICES WIT H M/S MOZAMBIQUE HOLDINGS LTD ON 14-08-2004. ACCORDING TO THE LD.DR THE CONSU LTANT M/S MOZAMBIQUE HOLDINGS LTD AGREED TO PROVIDE TECHNICAL AND MARKETI NG SUPPORT TO WIN THE CONTRACT WITH NATIONAL DIRECTORATE OF WATER FOR CON STRUCTION OF 800 BOREWELLS IN THE PROVINCES OF NAMPULA AND ZAMBEZIA. AFTER THE A GREEMENT WITH M/S MOZAMBIQUE HOLDINGS LTD THE ASSESSEE HAS ALSO ENTE RED INTO ANOTHER AGREEMENT WITH AFRICA DRILLING COMPANY FOR CONSTRUCTION OF 80 0 BOREWELLS IN THE PROVINCES OF NAMPULA AND ZAMBEZIA. ACCORDING TO THE LD.DR THE ASSESSEE WAS AWARDED THE CONTRACT THE VALUE OF WHICH WAS USD 928 MILLION BY AGREEING TO PAY CONSULTANCY CHARGES @15% ON THE VALUE OF THE CONTRACT. THE CON SULTANCY CHARGES PAYABLE BY THE ASSESSEE WAS TERMED AS AGENCY COMMISSION. RE FERRING TO SECTION 9(VII)(B) THE LD.DR SUBMITTED THAT ANY AMOUNT BY WAY OF FEE F OR TECHNICAL SERVICES PAYABLE BY A PERSON WHO IS A RESIDENT EXCEPT WHERE THE FEE S ARE PAYABLE IN RESPECT OF SERVICES UTILIZED IN A BUSINESS OR PROFESSION CARRI ED ON BY A PERSON OUTSIDE INDIA OR FOR THE PURPOSE OF MAKING OR EARNING ANY INCOME F ROM ANY SOURCE OUTSIDE INDIA THE INCOME OF RESIDENTS ARE DEEMED TO BE ACC RUED IN INDIA THEREFORE IT 5 ITA NO.415/COCH/2011 HAS TO BE INCLUDED IN THE TOTAL INCOME. ACCORDING TO THE LD.DR THE INCOME IS DEEMED TO HAVE ACCRUED OR ARISEN IN INDIA IN THE HA NDS OF THE ASSESSEE AND THEREFORE THE ASSESSEE IS LIABLE TO DEDUCT TAX WHI LE MAKING PAYMENT TO THE FOREIGN COMPANY U/S 195 OF THE INCOME-TAX ACT. THER EFORE ACCORDING TO THE LD.DR THE COMMISSIONER OF INCOME-TAX(A) HAS RIGHTLY CONFIRMED THE ORDER OF THE ASSESSING OFFICER ON THE GROUND THAT THE TDS WAS NO T MADE. 7. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS ON EITH ER SIDE AND ALSO PERUSED THE MATERIAL AVAILABLE ON RECORD. WE HAVE ALSO CAR EFULLY GONE THROUGH THE ORDERS OF LOWER AUTHORITIES. THE ASSESSING OFFICER DISALL OWED THE CLAIM OF THE ASSESSEE ON THE GROUND THAT THE AGENCY COMMISSION PAYABLE @1 5% ON THE VALUE OF THE CONTRACT HAS NOT BEEN FULLY PAID. THEREFORE THE A SSESSING OFFICER FOUND THAT THE AGENCY COMMISSION DEBITED TO THE EXTENT OF RS.4 26 26 195 IS ONLY A PROVISION THEREFORE IT IS NOT PAID. IT IS NOT IN DISPUTE TH AT THE ASSESSEE IS MAINTAINING BOOKS OF ACCOUNT IN MERCANTILE SYSTEM OF ACCOUNTING. IN FACT THIS WAS ADMITTED BY THE ASSESSING OFFICER IN THE ASSESSMENT ORDER AT COLUMN 7 OF HIS ORDER IN RESPECT OF METHOD OF ACCOUNTING. WHEN THE ASSESEE ADMITTEDLY FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING THE INCOME AROSE / ACCRUED TO THE ASSESSEE HAS TO BE BROUGHT FOR TAXATION. LIKEWISE THE EXPENSES ACTUAL LY PAID OR INCURRED BY THE ASSESSEE SHALL BE ALLOWED WHILE COMPUTING THE TAXAB LE INCOME. IN THIS CASE THE ASSESSEE IS LIABLE TO PAY RS.4 26 26 1905 AS ON 31-0 3-2007 TO M/S MOZAMBIQUE HOLDINGS LTD. THIS FACT IS NOT IN DISPUTE. MERELY BECAUSE THE AMOUNT WAS NOT PAID IN FULL THE ASSESSING OFFICER DISALLOWED THE C LAIM OF THE ASSESSEE. IN VIEW OF THE METHOD OF ACCOUNTING FOLLOWED BY THE ASSESSEE T HIS TRIBUNAL IS OF THE OPINION THAT WHEN THE LIABILITY HAS ARISEN DURING THE YEAR UNDER CONSIDERATION FOR PAYMENT OF AGENCY COMMISSION SUCH LIABILITY HAS TO BE ALLOWED AS DEDUCTION WHILE COMPUTING THE TAXABLE INCOME SINCE THE ASSESS EE IS FOLLOWING MERCANTILE 6 ITA NO.415/COCH/2011 SYSTEM OF ACCOUNTING. THEREFORE THE REASONS STATE D BY THE ASSESSING OFFICER FOR DISALLOWANCE OF THE CLAIM OF THE ASSESSEE ARE NOT J USTIFIED. 8. NOW COMING TO THE ORDER OF THE COMMISSIONER OF I NCOME-TAX(A) AS RIGHTLY SUBMITTED BY THE LD.REPRESENTATIVE FOR THE ASSESSEE EVEN THOUGH THE ASSESSEE CONTENDED THAT THE ASSESSEE WAS FOLLOWING MERCANTIL E SYSTEM OF ACCOUNTING AND THEREFORE THE ASSESSING OFFICER WAS NOT JUSTIFIED IN DISALLOWING THE CLAIM OF THE ASSESSEE THE COMMISSIONER OF INCOME-TAX(A) HAS NOT MADE ANY COMMENTS ON THAT. THE COMMISSIONER OF INCOME-TAX(A) PROCEEDED T O CONFIRM THE DISALLOWANCE ON THE GROUND THAT THE TAX WAS NOT DEDUCTED WHILE M AKING PAYMENT TO THE FOREIGN COMPANY. FROM THE ORDER OF THE COMMISSIONE R OF INCOME-TAX(A) IT APPEARS THAT THE COMMISSION WAS PAID FOR CONSULTANC Y. 9. LET US NOW EXAMINE THE AGREEMENT ENTERED INTO BE TWEEN THE ASSESSEE AND THE FOREIGN COMPANY M/S MOZAMBIQUE HOLDINGS LT D THE COPY OF WHICH IS AVAILABLE AT PAGE 1 TO 3 OF THE PAPER BOOK. NO DOUB T THE NOMENCLATURE OF THE AGREEMENT SAYS THAT THE AGREEMENT WAS CONSULTANCY A GREEMENT. A BARE READING OF THE AGREEMENT SHOWS THAT THE ASSESSEE HAS TO PAY 15% OF THE VALUE OF THE CONTRACT TO M/S MOZAMBIQUE HOLDINGS LTD TOWARDS PRO VIDING MARKETING SUPPORT TO WIN THE CONTRACT WITH NATIONAL DIRECTORATE OF WA TER FOR CONSTRUCTION OF 800 BOREWELLS IN THE PROVINCES OF NAMPULA AND ZAMBEZIA. THE AGENCY COMMISSION SHALL BE PAYABLE IN FOREIGN EXCHANGE. THE ENTIRE S UPPORT REQUIRES TO BE GIVEN BY M/S MOZAMBIQUE HOLDINGS LTD IS TO FACILITATE THE AW ARD OF BOREWELL CONSTRUCTION CONTRACT BY NATIONAL DIRECTORATE OF WATER. THE AGR EEMENT DOES NOT SAY THAT M/S MOZAMBIQUE HOLDINGS LTD HAS TO PROVIDE FOR CONSULTA NCY SERVICES OR TECHNICAL SERVICES. WHAT IS REQUIRED IS TO PROVIDE MARKETING SUPPORT FOR WINNING THE AWARD OF CONTRACT WITH NATIONAL DIRECTORATE OF WATER FOR CONSTRUCTION OF 800 BOREWELLS. 7 ITA NO.415/COCH/2011 THIS IS OBVIOUS FROM CLAUSE III OF THE AGREEMENT. FOR THE CONVENIENCE CLAUSE III OF THE AGREEMENT IS REPRODUCED HEREUNDER: CLAUSE III RESPONSIBILITIES OF THE CONTRACTOR 3.1 THE CONTRACTOR AGREES TO PROVIDE THE CONSULTANT ALL NECESSARY TECHNICAL INPUT ON THE PROPOSAL MADE TO THE NATIONAL DIRECTORATE OF WATER AND RESPOND TO ALL Q UERIES ON THE PROJECT WITHIN THE TIME FRAME. 3.2 THE CONTRACTOR IS COMMITTED TO PROVIDE AUTHORIZ ATIONS FOR THE CONSULTANT TO REPRESENT THE CONTRACTOR IN NEGO TIATIONS RELATED TO THE CONTRACT. 3.3 THE CONTRACTOR UNDERTAKES TO FULFILL ALL FINANCI AL OBLIGATIONS OF THE AGREEMENT WITHIN THE PROVISION OF THE AGREEMEN T. ONCE THE CONTRACT WAS AWARDED IN FAVOUR OF THE ASSE SSEE IT IS FOR THE ASSESSEE TO CONSTRUCT THE BOREWELLS. THE OBLIGATION OF THE ASS ESSEE AFTER AWARD OF CONTRACT IS TO PAY 15% AGENCY COMMISSION TO M/S MOZAMBIQUE HOLD INGS LTD. THEREFORE IT MAY NOT BE CORRECT TO SAY THAT WHAT WAS PAID IS CON SULTANCY CHARGES. IT IS ONLY AN AGENCY COMMISSION FOR THE PURPOSE OF WINNING THE CO NTRACT. EVEN ASSUMING THAT WHAT WAS PAID / PAYABLE IS CONSULTANCY CHARGES THI S TRIBUNAL IS OF THE OPINION THAT THE AMOUNT PAID / PAYABLE TO A FOREIGN COMPANY IS NOT TAXABLE IN INDIA. ADMITTEDLY THE FOREIGN COMPANY HAS NO PERMANENT ES TABLISHMENT IN INDIA. THE FOREIGN COMPANY HAS TO PROVIDE MARKETING SUPPORT FOR THE PURPOSE OF WINNING THE CONTRACT OUTSIDE THE COUNTRY. THE BOREWELL WAS ALSO TO BE DUG OUTSIDE THE COUNTRY. THE PAYMENT WAS ALSO TO BE MADE IN FOREIGN COUNTRY IN FOREIGN CURRENCY. THEREFORE NO PART OF THE CONTRACT WAS REQUIRED TO BE EXECUTED IN INDIA. THEREFORE MERELY BECAUSE THE ASSESSEE HAPPENED TO BE A RESIDENT IN INDIA THE PAYMENT MADE TO THE FOREIGN COMPANY OUTSIDE THE COU NTRY CANNOT BE CONSTRUED AS INCOME ACCRUED IN INDIA. IN OTHER WORDS NO PAR T OF INCOME HAS ACCRUED TO M/S 8 ITA NO.415/COCH/2011 MOZAMBIQUE HOLDINGS LTD IN INDIA THEREFORE IT IS NOT TAXABLE UNDER THE INCOME- TAX ACT. 10. THE NEXT QUESTION ARISES FOR CONSIDERATION IS WHEN THE INCOME IS NOT CHARGEABLE IN THE HANDS OF THE RECIPIENTS VIZ. M/S MOZAMBIQUE HOLDINGS LTD WHETHER THE ASSESSEE IS REQUIRED TO DEDUCT TAX AT T HE TIME OF PAYMENT. THIS ISSUE WAS EXAMINED ELABORATELY BY THE APEX COURT IN THE C ASE OF G.E. TECHNOLOGY CENTRE PVT LTD (SUPRA). AFTER CONSIDERING THE PROV ISIONS OF SECTION 195 AND THE CASE LAWS ON THE SUBJECT THE APEX COURT SPEAKING TH ROUGH THE HONBLE CHIEF JUSTICE S.H. KAPADIA HAS OBSERVED AS FOLLOWS: .. IT IS THE CASE OF THE DEPARTMENT THAT SECTION 195(2) AS INTERPRETED BY THE HIGH COURT WOULD PLUG THE LOOPH OLE AS THE SAID INTERPRETATION REQUIRES THE PAYER TO MAKE A DECLARAT ION BEFORE THE INCOME-TAX OFFICER (TDS) OF PAYMENT MADE TO NON-RESID ENTS. IN OTHER WORDS ACCORDING TO THE DEPARTMENT SECTION 195(2) IS A PROVISION BY WHICH THE PAYER IS REQUIRED TO INFORM THE DEPARTMENT OF THE REMITTANCES HE MAKES TO NON-RESIDENTS BY WHICH THE DEPARTMENT IS ABLE TO KEEP TACK OF THE REMITTANCES BE ING MADE TO NON-RESIDENTS OUTSIDE INDIA. WE FIND NO MERIT IN TH ESE CONTENTIONS. AS STATED HEREINABOVE SECTION 195(1) USE THE EXPRE SSION SUM CHARGEABLE UNDER THE PROVISIONS OF THE ACT. WE NE ED TO GIVE WEIGHTAGE TO THOSE WORDS. FURTHER SECTION 195 USE S THE WORD PAYER AND NOT THE WORD ASSESSEE. THE PAYER IS NOT AN ASSESSEE. THE PAYER BECOMES AN ASSESSEE-IN-DEFAULT ONLY WHEN HE FAILS TO FULFIL THE STATUTORY OBLIGATION UNDER SECTION 195(1 ). IF THE PAYMENT DOES NOT CONTAIN THE ELEMENT OF INCOME THE PAYER CA NNOT BE MADE LIABLE. HE CANNOT BE DECLARED TO BE AN ASSESSEE-IN-D EFAULT. THE ABOVEMENTIONED CONTENTION OF THE DEPARTMENT IS BASE D ON AN APPREHENSION WHICH IS ILL-FOUNDED. THE PAYER IS ALS O AN ASSESSEE UNDER THE ORDINARY PRO VISIONS OF THE INCOME-TAX ACT . WHEN THE PAYER REMITS AN AMOUNT TO A NON-RESIDENT OUT OF INDI A HE CLAIMS DEDUCTION OR ALLOWANCES UNDER THE INCOME-TAX ACT FOR THE SAID SUM AS AN EXPENDITURE. UNDER SECTION 40(A)(I) INSER TED VIDE FINANCE ACT 1988 WITH EFFECT FROM APRIL 1 1989 PAYMENT IN RESPECT OF 9 ITA NO.415/COCH/2011 ROYALTY FEES FOR TECHNICAL SERVICES OR OTHER SUMS CHARGEABLE UNDER THE INCOME-TAX ACT WOULD NOT GET THE BENEFIT OF DED UCTION IF THE ASSESSEE FAILS TO DEDUCT TAS IN RESPECT OF PAYMENTS OUTSIDE INDIA WHICH ARE CHARGEABLE UNDER THE INCOME-TAX ACT. THIS PROVISION ENSURE EFFECTIVE COMPLIANCE WITH SECTION 195 OF THE INCOME-TAX ACT RELATING TO TAX DEDUCTION AT SOURCE IN RESPECT OF P AYMENTS OUTSIDE INDIA IN RESPECT OF ROYALTIES FEES OR OTHER SUMS C HARGEABLE UNDER THE INCOME-TAX ACT. IN A GIVEN CASE WHERE THE PAYER IS AN ASSESSEE HE WILL DEFINITELY CLAIM DEDUCTION UNDER THE INCOME -TAX FOR SUCH REMITTANCE AND ON INQUIRY IF THE ASSESSING OFFICER FINDS THAT THE SUMS REMITTED OUTSIDE INDIA COME WITHIN THE DEFINIT ION OF ROYALTY OR FEES FOR TECHNICAL SERVICE OR OTHER SUMS CHARGEABLE UNDER THE INCOME-TAX ACT. THIS PROVISION ENSURES EFFECTIVE CO MPLIANCE WITH SECTION 195 OF THE INCOME-TAX ACT RELATING TO TAX DE DUCTION AT SOURCE IN RESPECT OF PAYMENTS OUTSIDE INDIA IN RESP ECT OF ROYALTIES FEES OR OTHER SUMS CHARGEABLE UNDER THE INCOME-TAX A CT. IN A GIVEN CASE WHERE THE PAYER IS AN ASSESSEE HE WILL DEFINIT ELY CLAIM DEDUCTION UNDER THE INCOME-TAX ACT FOR SUCH REMITTAN CE AND ON INQUIRY IF THE ASSESSING OFFICER FINDS THAT THE SUM S REMITTED OUTSIDE INDIA COME WITHIN THE DEFINITION OF ROYALTY OR FEES FOR TECHNICAL SERVICE OR OTHER SUMS CHARGEABLE UNDER THE INCOME-TA X ACT THEN IT WOULD BE OPEN TO THE ASSESSING OFFICER TO DISALLOW SUCH CLAIM FOR DEDUCTION. SIMILARLY VIDE THE FINANCE ACT 2008 WITH EFFECT FROM APRIL 1 2008 SUB-SECTION (6) HAS BEEN INSERTED IN SECTION 195 WHICH REQUIRES THE PAYER TO FURNISH INFORMATION RELATING TO PAYMENT OF ANY SUM IN SUCH FORM AND MANNER AS MAY BE PRESCRIBE D BY THE BOARD. THIS PROVISION IS BROUGHT INTO FORCE ONLY F ROM APRIL 1 2008. IT WILL NOT APPLY FOR THE PERIOD WITH WHICH WE ARE CONCERNED IN THESE CASE BEFORE US. THEREFORE IN OUR VIEW THER E ARE ADEQUATE SAFEGUARDS IN THE ACT WHICH WOULD PREVENT REVENUE L EAKAGE. 11. IN VIEW OF THE ABOVE OBSERVATIONS OF THE APEX C OURT THE ASSESSEE IS NOT LIABLE TO DEDUCT TAX SINCE NO PART OF THE PAYMENT M ADE TO M/S MOZAMBIQUE HOLDINGS LTD IS TAXABLE IN INDIA. A SIMILAR VIEW W AS ALSO TAKEN BY THE DELHI HIGH COURT ON IDENTICAL CIRCUMSTANCES IN THE CASE OF EON TECHNOLOGY SERVICES (2012) 246 CTR (DEL) 40. THEREFORE THE LOWER AUTHORITIES ARE NOT JUSTIFIED IN DISALLOWING THE CLAIM OF THE ASSESSEE WITH REGARD TO AGENCY COM MISSION PAID / PAYABLE TO 10 ITA NO.415/COCH/2011 M/S MOZAMBIQUE HOLDINGS LTD. ACCORDINGLY THE ORDE R OF THE LOWER AUTHORITIES ARE SET ASIDE AND ADDITION OF RS.4 26 265 195 IS DE LETED. 12. THE NEXT GROUND OF APPEAL IS WITH REGARD TO DIS ALLOWANCE OF R.1 63 066 ON THE GROUND THAT THE ASSESSEE HAS DIVERTED INTEREST BEARING FUNDS FOR NON BUSINESS PURPOSE. 13. SHRI IYPE MATHEW THE LD.REPRESENTATIVE FOR THE ASSESSEE SUBMITTED THAT THE ASSESSING OFFICER HAS DISALLOWED INTEREST TO TH E EXTENT OF RS.1 63 066 OUT OF THE INTEREST DEBITED TO THE PROFIT & LOSS ACCOUNT. THE LD.REPRESENTATIVE SUBMITTED THAT THE COMPANY HAS SUFFICIENT FUNDS IN THE FORM O F SHARE CAPITAL RESERVES AND SURPLUS AND ALSO INTEREST FREE ADVANCES FROM ANOTHE R DIRECTOR TO THE EXTENT OF RS.1 54 92 813 AS ON 31-03-2006. ACCORDING TO THE LD .REPRESENTATIVE NO AMOUNT WAS ADVANCED FROM THE LOAN BORROWED BY THE ASSESSEE . ACCORDING TO THE LD.REPRESENTATIVE THE ASSESSEE HAS ITS OWN FUNDS I N THE BANK ACCOUNT TO THE EXTENT OF RS.55 10 695 AS AGAINST THE BANK OVERDRAFT OF RS.25 06 984. THE OVERDRAFT WAS ALSO CLOSED AS AT 31-03-2007. THE ASSE SSEE HAS ADVANCED ITS OWN FUNDS TO ITS DIRECTORS. THEREFORE DISALLOWANCE OF ANY PART OF INTEREST IS NOT JUSTIFIED. FOR THIS PROPOSITION THE LD.REPRESENTA TIVE HAS PLACED RELIANCE ON THE JUDGMENT OF THE APEX COURT IN THE CASE OF MUNJAL SA LES CORPORATION 298 ITR 298 (SC). 14. ON THE CONTRARY SMT. VIJAYAPRABHA THE LD.DR S UBMITTED THAT THE ASSESSEE HAS DEBITED RS.10 65 019 TOWARDS INTEREST ON BANK LO AN. ACCORDING TO THE LD.DR THE ASSESSEE IS PAYING INTEREST TO THE BANK ON OVERD RAFT ACCOUNT AND AT THE SAME TIME NOT COLLECTING ANY INTEREST ON THE LOANS ADVAN CED TO ITS DIRECTORS. THEREFORE 11 ITA NO.415/COCH/2011 ACCORDING TO THE LD.DR THE ASSESSING OFFICER HAS RI GHTLY DISALLOWED THE INTEREST TO THE EXTENT OF RS.1 63 066. 15. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND AL SO PERUSED THE MATERIAL AVAILABLE ON RECORD. THE CLAIM OF THE ASSESSEE IS THAT IT HAS ITS OWN FUNDS TO THE EXTENT OF RS.65 70 695 AS AGAINST OVERDRAFT OF RS.2 5 06 894. THE ASSESSEE ALSO CLAIMED THAT IT HAS SUFFICIENT AMOUNT IN THE FORM O F SHARE CAPITAL RESERVE SURPLUS AND INTEREST FREE ADVANCES FROM OTHER DIRECTORS. H OWEVER THE LOWER AUTHORITIES HAVE NOT EXAMINED THE AVAILABILITY OF INTEREST FREE FUNDS IN THE HANDS OF THE ASSESSEE. THEREFORE THIS TRIBUNAL IS OF THE OPINI ON THAT THE ASSESSING OFFICER HAS TO EXAMINE THE AVAILABILITY OF INTEREST FREE FUNDS AT THE HANDS OF THE ASSESSEE IN THE LIGHT OF THE JUDGMENT OF THE SUPREME COURT IN T HE CASE OF MUNJAL SALES CORPORATION (SUPRA). SINCE THE LOWER AUTHORITIES H AVE NOT EXAMINED THE ISSUE IN THE LIGHT OF THE JUDGMENT OF THE APEX COURT THE OR DER OF LOWER AUTHORITY IS SET ASIDE AND THE ISSUE OF DISALLOWANCE OF INTEREST TO THE EXTENT OF RS.1 63 066 IS REMITTED BACK TO THE FILE OF THE ASSESSING OFFICER. THE ASSESSING OFFICER SHALL RE- EXAMINE THE MATTER IN THE LIGHT OF JUDGMENT OF THE APEX COURT IN THE CASE OF MUNJAL SALES CORPORATION (SUPRA) AND THEREAFTER DEC IDE THE ISSUE IN ACCORDANCE WITH LAW AFTER GIVING OPPORTUNITY OF HEARING TO THE ASSESSEE. 16. IN THE RESULT THE APPEAL OF THE ASSESSEE IS AL LOWED FOR STATISTICAL PURPOSE. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 29 TH DAY OF FEBRUARY 2012. SD/- SD/- (B.R. BASKARAN) (N.R.S. GANESAN) ACCOUNTANT MEMBER JUDICIAL MEMBER COCHIN DT : 29 TH FEBRUARY 2012 PK/- 12 ITA NO.415/COCH/2011 COPY TO: 1. M/S SOUTHERN BOREWELLS PVT LTD SHASTRI JUNCTION KO LLAM 2. DY.COMMISSIONER OF INCOME-TAX CIR.1 KOLLAM 3. THE C.I.T(A)-I TRIVANDRUM 4. THE C.I.T. TRIVANDRUM 5. THE DR (TRUE COPY) BY ORDER ASSTT. REGISTRAR INCOME-TAX APPELLATE TRIBUNAL COCHIN BENCH