Case Number: ITA 5929/DEL/2019
Appellant: DCIT Central Circle-31, New Delhi
Respondent: Cheslind Textiles Ltd., Rajasthan
Assessment Year: 2012-13
Result: 2012-13
Case Filed on: 2019-07-08
Order Type: Final Tribunal Order
Date of Order: 2022-06-01
Pronounced on: 2022-06-01
The case involves an appeal by the Revenue (DCIT Central Circle-31, New Delhi) against Cheslind Textiles Ltd., located in Bhilwara, Rajasthan. The dispute arose over disallowances under Section 40(a)(i) of the Income Tax Act and the classification of Technology Upgradation Fund (TUF) subsidy for the assessment year 2012-13. The appeal was heard by the Delhi Bench ‘B’ of the Income Tax Appellate Tribunal (ITAT).
The Revenue filed the appeal challenging the decision of the Commissioner of Income Tax (Appeals)-30, New Delhi, who had allowed the claims of Cheslind Textiles Ltd. regarding the disallowance of export commission payments and the classification of TUF subsidy as capital receipts. The grounds of appeal were primarily focused on the incorrect application of Section 40(a)(i) and the misinterpretation of the nature of TUF subsidy.
The case was heard on 02.05.2022, and the order was pronounced on 01.06.2022. The key issues addressed in the proceedings were:
Cheslind Textiles Ltd. had appointed agents in various countries and made payments amounting to Rs. 2,41,93,337/- as commission on export sales. The Assessing Officer (AO) disallowed this payment under Section 40(a)(i), arguing that the income was chargeable to tax in India and hence TDS should have been deducted.
The CIT(A) deleted the disallowance by relying on the ITAT’s decisions for the assessment years 2010-11 and 2011-12, where similar issues were resolved in favor of the assessee. The ITAT upheld this decision, stating that the commission was paid to non-resident agents for services rendered outside India, and there was no Permanent Establishment (PE) in India. Hence, the payments were not subject to tax in India.
The Revenue argued that the CIT(A) failed to consider CBDT Circular No. 05/2014, which clarifies that Rule 8D read with Section 14A provides for disallowance of expenditure even when no exempt income is earned. However, the ITAT noted that Cheslind Textiles Ltd. had made investments for captive consumption and did not claim any exempt income, thus Section 14A was not applicable.
Cheslind Textiles Ltd. received a TUF subsidy of Rs. 1,42,36,701/- during the year, which was initially treated as a revenue receipt. During the assessment proceedings, the assessee requested to reclassify this subsidy as a capital receipt based on a Supreme Court judgment. The AO rejected this request, stating that the assessee should have filed a revised return. The CIT(A) allowed the reclassification, considering the subsidy was meant for technology upgradation and thus capital in nature.
The ITAT dismissed the Revenue’s appeal, upholding the CIT(A)’s order. The tribunal emphasized that payments to non-resident agents for services rendered outside India without a PE in India are not subject to tax under Section 195. Additionally, the TUF subsidy, intended for technological upgradation, qualifies as a capital receipt.
Order pronounced in the open court on 1st June, 2022.
(Dr. B. R. R. Kumar, Accountant Member)
(Anubhav Sharma, Judicial Member)
Copy forwarded to:
ASSISTANT REGISTRAR, ITAT, DELHI
The case of DCIT Central Circle-31, New Delhi vs Cheslind Textiles Ltd. pertains to the assessment year 2012-13. The initial order by the Commissioner of Income Tax (Appeals)-30, New Delhi, dated 30.04.2019, was contested by the Revenue. The core issues revolved around the disallowance of export commission payments and the classification of TUF subsidy.
The Revenue filed an appeal against Cheslind Textiles Ltd., a company engaged in the manufacture and export of textiles, particularly cotton yarn and knitted fabrics. The appeal was aimed at addressing the disallowance of commission payments made to non-resident agents and the classification of TUF subsidy as capital receipts.
Cheslind Textiles Ltd. appointed agents in various countries to market, promote, and sell their products. The company made payments to these non-resident agents as commission on export sales. The AO disallowed these payments under Section 40(a)(i), stating that the income arises in India and is chargeable to tax. The CIT(A), however, relied on previous ITAT decisions and allowed the appeal of Cheslind Textiles Ltd., stating that the payments were made for services rendered outside India and there was no PE in India, hence not taxable in India.
The ITAT upheld this view, emphasizing that the non-resident agents did not have any business connection or PE in India, and the payments were for services rendered outside India. Thus, the commission payments were not subject to tax in India under Section 195.
The Revenue’s argument was based on CBDT Circular No. 05/2014, which clarifies that disallowance under Rule 8D read with Section 14A applies even if no exempt income is earned. However, Cheslind Textiles Ltd. had made investments for captive consumption and did not claim any exempt income. The ITAT noted that the provisions of Section 14A could not be invoked in the absence of exempt income.
Cheslind Textiles Ltd. received a TUF subsidy from the Ministry of Textiles, Government of India, aimed at encouraging technology upgradation. Initially, the company treated this subsidy as a revenue receipt and paid tax on it. During the assessment proceedings, they sought to reclassify it as a capital receipt based on a Supreme Court judgment, which was allowed by the CIT(A). The Revenue opposed this reclassification, stating that the assessee should have filed a revised return.
The ITAT upheld the CIT(A)’s decision, considering the purpose of the TUF subsidy was to enhance technology and competitiveness, thus qualifying it as a capital receipt. The tribunal noted that the subsidy was intended for modernization and expansion, meeting the criteria for capital receipts as per judicial precedents.
Order pronounced in the open court on 1st June, 2022, marks the conclusion of this case, with the tribunal dismissing the Revenue’s appeal and upholding the CIT(A)’s order.
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