Commissioner of Income Tax vs Allied Exims

We have heard Shri Dhananjay Awasthi, learned counsel for the appellant. Shri Ashish Bansal appears for the respondent-assessee. This appeal has been preferred by the income tax Department u/s 260A of the income tax Act, 1961, against the order dated May 28, 2013, passed by the income tax Appellate Tribunal, Lucknow, in I.T.A. No. 700/Lkw./2011 for the assessment year 2008-09.

The Department has preferred the following questions of law for consideration in this appeal:

(1) Whether, on the facts and in the circumstances of the case, the income tax Appellate Tribunal has erred in law in not appreciating the provisions of the Explanation as inserted by the Finance Act, 2010, with effect from June 1, 1976, in sub-section (2) of section 9?

(2) Whether, on the facts and in the circumstances of the case, the income tax Appellate Tribunal erred in law in putting reliance on CBDT Circular No. 786 of 2000, dated February 7, 2000 See [2000] 241 ITR (St.) 132, whereas no cognizance has been taken of Board''s Circular No. 7 of 2009, dated October 22, 2009 See [2009] 318 ITR (St.) 1, which clarifies the ambiguous interpretation of the provision of law and is clarificatory in nature and, therefore, is applicable retrospectively and effectively covers the case of the assessee?

(3) Whether, on the facts and in the circumstances of the case, the income tax Appellate Tribunal erred in law in misinterpreting the provisions of section 195 read with section 9(1)(vii) read with section 40(a)(ia)?

(4) Whether, on the facts and in the circumstances of the case, the income tax Appellate Tribunal was justified in law in ignoring the ratio of the judgment of the Hon''ble apex court in Commissioner of Income Tax Vs. Moser Baer India Ltd., wherein it has been held that clarificatory nature of the amendment in the statute is retrospective in nature?

(5) Whether, on the facts and in the circumstances of the case, the income tax Appellate Tribunal has erred in law in ignoring the Explanation inserted by the Finance Act, 2010, retrospectively effective from June 1, 1976, in sub-section (2) of section 9?

In the present case, the return was filed on September 27, 2008, prior to the issuance of Circular dated October 22, 2009.

The questions raised in this appeal are covered by the judgment of this court in Commissioner of Income Tax and Another Vs. Model Exims, . This court decided the questions of law in favour of the assessee and against the Revenue on the following findings (pages 76 and 77):

The income tax Appellate Tribunal considered the submissions of both the parties and held relying upon its earlier decision in Deputy CFT v. Sanjiv Gupta decided on January 7, 2011, [2011] 50 DTR (AT.) 225 (Lucknow) that where a circular issued earlier created a vested right in the taxpayer and such right is sought to be curtailed or withdrawn by a subsequent circular, then such subsequent circular will not have a retrospective effect. The income tax Appellate Tribunal confirmed the order of the Commissioner of income tax (Appeals) and dismissed the appeal.

Shri Dhananjay Awasthi submits that liability to deduct tax arises out of section 195 of the Act. The disallowance was made by the Assessing Officer u/s 40(a)(i) for non-deduction of tax at source u/s 195. The liability has to be determined in accordance with the provisions of law and not of the circular. Even if earlier circulars did not make it obligatory on the part of assessee to deduct IDS since by Circular No. 7 of 2009 all earlier circulars were withdrawn, the assessee would be liable as the withdrawal of the earlier circulars would be retrospective in nature and further that the assessment has to be made after withdrawal of the circular in accordance with law. The circulars did not create any vested right and were only by way of clarification, which were withdrawn. The observations made by the Assessing Officer u/s 40(a)(i) for non-deduction of tax at source u/s 195 was justified.

Commissioner of Income Tax Vs. Moser Baer India Ltd., in which considering the provisions of Explanation 4 to section 271(1)(c)(iii) the Supreme Court held that the amendment is only clarificatory and would apply even to earlier assessment years.

In the present case, we are concerned with the circulars, which did not oblige the assessee to deduct TDS. The assessment in question for the assessment year 2007-08 would be governed by the circular, which was operative at the relevant time. The assessee was not entitled to deduct TDS. The Department could not have taken different stand in subsequent years or assessment year 2007-08, when the circulars were operative and were not withdrawn. Circular No. 7 of 2009, dated October 22, 2009, withdrawing earlier circulars became operative only from October 22, 2009.

We also do not agree with learned counsel for the income tax Department that there was obligation to deduct tax at source u/s 195 on the commission paid to non-resident recipient, who Was not liable to pay tax in India. In such case the assessee payer was not liable to deduct tax at source u/s 195(1).

Learned counsel for the respondent-assessee submits that apart from argument based on circular, the Commissioner of income tax (Appeals) also observed as a matter of fact that the Assessing Officer has not brought anything on record, which could demonstrate that non-resident agents had been appointed as selling agents, designers or technical advisers. The payment of commission to foreign agents did not entitle such foreign agents to pay tax in India and thus the TDS was not liable to be deducted.

Having carefully considered the submissions, we are of the view that the circulars in the Relevant year was binding upon the Department and assessee can challenge the effect of the circular but that the Assessing Officer did not have any right to ignore the circulars and to disallow non-deduction of tax at source u/s 195 and u/s 40(a)(i) of the Act.

We find that the facts and in the circumstances and the questions of law in this appeal are the same as were decided in the judgment in CIT v. Model Exims (supra). The questions of law are thus decided in favour of assessee and against the Revenue. The income tax appeal is dismissed.