* IN THE HIGH COURT OF DELHI AT NEW DELHI
+ ITA No. 179/2001
Reserved on: 25th July, 2014
% Date of Decision:28th August, 2014
Commissioner of Income Tax, Delhi II ....Appellant
Through Mr. Balbir Singh, Sr. Standing
Counsel with Mr. Abhishek Singh
Baghel, Adv
Versus
M/s Kohinoor Impex P. Ltd. ...Respondent
Through None
CORAM:
HON'BLE MR. JUSTICE SANJIV KHANNA
HON'BLE MR. JUSTICE V. KAMESWAR RAO
SANJIV KHANNA, J.
This appeal by the Revenue which relates to assessment year
1986-87, was admitted for hearing vide order dated 8th January, 2002
on the following substantial questions of law:
"(A) Whether the ITAT was correct in law in
allowing the deduction in respect of amount of
Rs.19,94,704/- paid to the non-resident foreign
company without having deducted tax at source u/s.
195 of Income Tax Act?
(B) Whether the ITAT has correctly interpreted
the provision of 40(a)(i), Sec. 95 (sic 195) and
9(1)(v) of the Act?
(C) Whether the ITAT as correct in law in
holding that the amount of Rs.19,94,704/- does not
represent the interest but the sale consideration and
no tax is required to be deducted?"
ITA 179/2001 Page 1 of 8
2. The respondent assessee had imported brush less motors from
M/s Kashpo International Ltd., U.K. and had made payment of
Rs.19,94,704/-, which was claimed as expenditure. In the assessment
order framed on 31st March, 1989, the Assessing Officer determined
the net total income of the assessee but did not disturb or disallow this
expenditure.
3. Commissioner of Income Tax (Central) II, by order dated 27th
March, 1991, in exercise of power under Section 263 of the Income
Tax Act (Act, for short), partly set aside the assessment order and
directed the Assessing Officer to make fresh assessment after deciding
whether assessee had failed to deduct tax at source under Section 195
of the Act and, therefore, provisions of Section 40(a)(i) of the Act
were attracted. He observed that the said aspect has not been
examined by the Assessing Officer. He also referred to Section
9(1)(v) of the Act, which refers to the interest payment and observed
that the Assessing Officers order was erroneous as he had not
examined whether the amount paid to Kashpo International Ltd., U.K.
was interest paid on delayed payments, attracting Section 195 and in
default under Section 40(a)(i) of the Act. It was observed that the
amount had been shown to be interest by the respondent assessee.
Assessing Officer was required to hear the respondent assessee before
adjudication and taking the final decision.
4. In the assessment order passed under Section 143(3) read with
Section 263 of the Act, the Assessing Officer observed that no
evidence had been led to conclusively establish that the payment of
interest on delayed payment was relatable to purchase and constituted
purchase price paid to the foreign supplier and these were two integral
ITA 179/2001 Page 2 of 8
limbs of the same transaction. Sale of goods required payment of the
goods supplied to the foreign supplier at the purchase price and as
there was a failure to pay the price, the Indian assessee has paid a sum
of Rs.19,94,704/-. In this manner, payment of Rs.19,94,704/-
constituted interest. He rejected the argument that the Bank which
had made the payment had acted as the principal, observing that the
bank was an agent as the respondent assessee instead of making the
payment directly had utilized the services of said banker to make
payment. The Assessing Officer deemed it appropriate to invoke
Section 9(1)(i) of the Act and held that income of Rs.19,94,704/- was
taxable in India in India and as tax at source has not been deducted,
Section 40(a)(i) was attracted. He also reworked computation of
deduction under Section 80HHC in view of the said finding.
5. Commissioner of Income Tax (Appeals) (,,CIT (Appeals), for
short) held that Rs.19,94,704/- was not paid as interest but was
payment made for settlement of the claim of the Kashpo International
Ltd., U.K. He held that the Assessing Officer has either made
incorrect or untenable factual assertions. Section 9(1)(i) of the Act
had been wrongly invoked on the premise that the U.K. based
company had business connection in India. He held that
Rs.19,94,704/- was a part and parcel of the purchase price for the
goods supplied by the U.K. company and, therefore, was not interest.
Before CIT (Appeals), in view of the written submissions made,
comments of the Deputy Commissioner of Income Tax were called
and he had submitted a report. Report of the Deputy Commissioner
accepted that the assessee had not paid interest in respect of borrowing
made from U.K. based party. He also accepted that the amount paid
ITA 179/2001 Page 3 of 8
was not interest but it was paid in settlement of claim of interest. No
percentage of interest had been quoted and, therefore, the assessee was
justified in stating that the amount paid was towards sale price of the
goods purchased and also for settlement of delayed payment.
6. Aggrieved, Revenue preferred an appeal before the Tribunal
who have, by the impugned order dated 12th March, 2001 dismissed
the said appeal. Tribunal, in the impugned order, have held that
interest payment outside India was covered and chargeable to tax but
the issue was whether Rs.19,94,704/- paid was interest or was sale
consideration. Sale consideration paid to the foreign company for
supply of goods would not be taxable in India. The appeal was
dismissed observing that the Deputy Commissioner of Income Tax
had agreed that the amount paid to the Kashpo International Ltd., U.K.
did not relate to payment of interest and it represented the cost price
finally settled for the material imported by the assessee. It was part of
the purchase price and, therefore, no tax was required to be deducted.
7. Interest payments by a resident to a non-resident, if covered by
Section 9(1)(v) is deemed to be income of the non-resident in India.
Interest paid to a foreign party/seller for delayed payment of goods
was dealt with Gujarat High Court in Commissioner of Income Tax
vs. Vijay Ship Breaking Corporation [2003] 261 ITR 113, and it was
held to be taxable under Section 9(1)(v) of the Act. The assessee had
then preferred an appeal before the Surpeme Court which was
admitted and disposed of by judgment reported as [2009] 314 ITR 309
(SC). However, the Supreme Court did not examine the issue on
merits in view of the Explanation 2 to Section 10(15)(iv)(c) of the Act
applicable to ship breaking industry, to the effect that usance interest
ITA 179/2001 Page 4 of 8
payable outside India by the company engaged in business of ship
breaking was treated as debt incurred in foreign country in respect of
purchase outside India. We also have a decision of the Delhi High
Court in J.K. Synthetics Ltd. Vs. ACIT [1990] 185 ITR 540, in which
reference was made to Section 9(1)(v) and it was held that payment of
interest made to the foreign supplier would be covered under the said
Section. However, in the facts of the present case, the finding recorded
by the Tribunal on the basis of the report of the Deputy Commissioner
of Income Tax is that the amount paid represented the purchase price
finally settled for the material/goods imported and it did not represent
interest. Order passed by the Assessing Officer did not refer to
Section 9(1)(v) of the Act but he had relied upon Section 9(1)(i) of the
Act. This is inspite of the fact that the Commissioner in his order
under Section 263 had specifically referred to Section 9(1)(v) and also
stated that the assessee had shown the amount in his accounts as
interest. This creates doubt in our mind whether Rs.19,94,704/- paid
was in fact interest for delayed payment or as stated by the Tribunal,
the purchase price itself which was finally settled. If it was interest,
then another aspect which required examination was whether the
amount would be covered and exempt from payment of tax under
Section 10(15)(iv)(c) of the Act, in which case tax at source was not
required to be deducted.
8. Revenue is the appellant before us and has not placed the
relevant documents under which the payments were made or relating
to the settlement. Revenue has not placed before us even copy of the
report given by the Deputy Commissioner of Income Tax. Full
particulars and details regarding the purchase price, whether there was
ITA 179/2001 Page 5 of 8
specific stipulation regarding delayed payment, consequences thereof,
when did the title in the goods pass to the respondent assessee etc. are
not on record and not discussed in the assessment order. A remand
after a gap of more than 25 years would not be justified.
9. In the absence of the said details and documents and keeping in
mind the findings of fact recorded by the Tribunal, it is difficult for us
to answer the questions and issues. In these circumstances, we do not
think that it will be appropriate to answer the questions of law against
the respondent assessee, if we accept the factual finding given by the
Tribunal that amount paid was part of the purchase price which was
payable. Decision of the Tribunal may not be correct, if the amount
paid represented interest payment as possibly the amount would then
be covered under Section 9(1)(v) of the Act. But the said provision
was not specifically invoked by the Assessing Officer. Further
taxability would depend on whether the said income was exempt
under Section 10(15)(iv)(c) of the Act. Another issue which would
arise would be whether the interest was taxable as per the provisions
of the Double Taxation Avoidance Agreement, again an issue which
has not been raised, and examined.
10. This apart another aspect would arise for consideration. Central
Board of Direct Taxes had issued Circular No. 23 dated 23 rd July,
1969, the relevant portion of which reads as under:-
"XXXXXXXX
3. The following clarifications would be found
useful in deciding questions regarding the
applicability of the provisions of section 9 in
certain specific situations:
ITA 179/2001 Page 6 of 8
XXXXXXXX
(6) Sale by a non-resident to Indian customers
either directly or through agents.
(a) Where a non-resident allows an Indian
customer, facilities of extended credit for
payment, there would be no assessment merely
for this reason provided that (i) the contracts to
sell were made outside India and (ii) the sales
were made on a principal-to-principal basis.
XXXXXXXX"
The said circular has been withdrawn with effect from 22 nd October,
2009 vide Circular No. 7 of 2009. The withdrawal does not affect
impugned transaction as the same took place in the previous year
relevant to the assessment year 1986-87. Thus, it could be argued that
no liability would have arisen under Section 9(1)(i) read with Section
195 of the Act in terms of the Circular No. 23 of 1969 (supra). The
Assessing Officer and Revenue did not plead and contend that the sale
transaction was not on principal-to-principal basis or the sale contract
was made in India and not outside India. The assessment order is
woefully silent and quiet on the said material aspects. This possibly
explains the stand and stance taken by the Deputy Commissioner of
Income Tax in his response accepting that the amount paid was in
settlement of delayed payment for the goods purchased and was not
paid in respect of any borrowing made from the Kashpo International
Ltd.
11. In view of the aforesaid position, the questions of law
mentioned above, are not answered for failure to place
ITA 179/2001 Page 7 of 8
papers/documents on record for proper and just adjudication of the
questions raised. The appeal is, accordingly, disposed of.
-sd-
(SANJIV KHANNA)
JUDGE
-sd-
(V. KAMESWAR RAO)
JUDGE
August 28, 2014
kkb
ITA 179/2001 Page 8 of 8
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