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2011 (11) TMI 20 - HC - Income TaxAddition u/s 40(a)(i) - TDS on commission income - business connection - Income of non resident - Income deemed to accrue or arise in India - Circular No.23 dated 23.07.1969 - Revenue contended that the commission income of ₹ 33,36,068/- earned by ETUK had accrued in India or was deemed to accrued in India and, therefore, the respondent assessee was liable to deduct tax at source and as there was failure, the said expenditure should be disallowed under Section 40(a)(ia) of the Act. - Held that - The scope and ambit of Section 195 of the Act has been explained by the Supreme Court in GE India Techonology Centre (P) Ltd. vs. CIT (2010 -TMI - 77380 - SUPREME COURT OF INDIA). In the said case the expression any other sum chargeable under the provisions of the Act in Section 195 of the Act was elucidated and explained. It was held that if payment is made in respect of the amount which is not chargeable to tax under the provisions of Act, tax at source (TDS, for short) is not liable to be deducted. Decision of Supreme Court in Transmission Corporation of Andhra Pradesh vs. CIT, (1999 -TMI - 5757 - SUPREME Court), operates and is applicable when the sum or payment is chargeable to tax under the provisions of the Act. In such cases, TDS has to be deducted on the gross amount of payment made and not merely on the taxable income included in the gross amount. The said decision would not apply in case payment is made but the said sum in entirety is not chargeable or exigible to tax under the provisions of the Act. The said distinction has been rightly understood by the first appellate authority and the ITAT and correctly applied by them. - Decided in favor of assessee.
Issues Involved:
1. Whether the Income Tax Appellate Tribunal (ITAT) erred in upholding the order of the Commissioner of Income Tax (Appeals) [CIT(A)] deleting the addition made by the Assessing Officer (AO) under Section 40(a)(i) of the Income Tax Act, 1961. Issue-wise Detailed Analysis: 1. Nature of Commission Paid: The respondent, a private limited company, paid a commission of Rs. 33,36,068/- to its parent company in the UK for procuring export contracts. The nature, quantum, and entitlement of the commission were undisputed. 2. Revenue's Contention: The Revenue argued that the commission income earned by the UK company accrued or was deemed to accrue in India, making the respondent liable to deduct tax at source. Failure to do so should lead to disallowance under Section 40(a)(i) of the Act. 3. Assessing Officer's Reasoning: The AO's reasoning was deemed confusing and unclear. The AO held that the right to receive income by the UK company had its origin in India, and thus, the commission income was taxable in India. The AO also mentioned the business connection between the respondent and the UK company but did not elaborate on this aspect. 4. Concept of Deemed Accrual: The court clarified that the concept of deemed accrual of income is distinct from income actually accruing, arising, or being received in India. Section 5(2) of the Act was discussed, which includes income received or deemed to be received in India or accruing or deemed to accrue in India. 5. Section 9 of the Act: Section 9 postulates when income is deemed to arise in India. The AO did not specify any provision of Section 9 but seemed to invoke Section 9(1)(i), which deals with income accruing through business connections in India. The AO failed to examine whether the commission income arose directly or indirectly from any business connection in India. 6. Circulars by CBDT: The CIT(A) relied on two CBDT circulars, Circular No. 23 dated 23rd July 1969 and Circular No. 786 dated 7th February 2000. Both circulars clarified that commission paid to foreign agents operating outside India is not taxable in India, and no tax is deductible under Section 195 from such payments. 7. Supreme Court Decisions: The court referred to the Supreme Court's decision in C.I.T. vs. Toshoku Limited, which held that commission earned by non-residents for services rendered outside India cannot be deemed to have accrued or arisen in India. The court also cited the Supreme Court's interpretation of "business connection" in various cases, emphasizing that it requires a real and intimate connection contributing to the income earned. 8. Section 195 of the Act: The scope of Section 195 was discussed, with reference to the Supreme Court's decision in GE India Technology Centre (P) Ltd. vs. CIT. It was held that TDS provisions apply only to sums chargeable to tax under the Act. If the payment is not chargeable to tax, TDS is not required. 9. Conclusion: The court concluded that the CIT(A) and ITAT correctly applied the law and found no error in their findings. The appeal was dismissed, and no costs were awarded. Summary: The court upheld the ITAT's decision, agreeing that the commission paid to the UK company did not accrue or arise in India and was not subject to TDS under Section 195. The AO's reasoning was found to be unclear and unsupported by factual examination. The court relied on CBDT circulars and Supreme Court decisions to conclude that the commission income was not taxable in India, leading to the dismissal of the Revenue's appeal.
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