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2017 (9) TMI 1794 - AT - Income TaxTDS u/s 195 - withholding tax - non-deduction of tax on payments of commission to non-resident/foreign commission agents - commission paid to foreign commission agents is deemed to accrue or arise in India - PE in India - busniss connection of India - Applied section 9(1)(i) or 9(2) - AO s contention that the CBDT had withdrawn its Circulars Nos. 23 dt. 23.07.1969 was issued in the context of section 9 of the Act which deems certain incomes to accrue or arise in India for non-residents; and that in view of this the assessee should have deducted tax at source u/s. 195 of the Act on payments of commission made to non-residents agents w.e.f. 22.10.2009 HELD THAT - It is not disputed that that the withdrawal of the Circulars No. 23 and 786 has been made on 22.10.2009 vide CBDT Circular No. 7 of 2009 and mere withdrawal of the circular does not negate the principles of income deemed to accrue or arise in India or outside India. The CBDT has not stated that any part of the circulars is contrary to law or that the circulars were wrongly issued or that the law has undergone changes holding their withdrawal. Thus in respect of cases which directly follow with the situations covered by the circulars the liability to tax should continue to be in accordance with section 9 of the Act and its intent. The relevant sections namely section 5(2) and section 9 of the Income-tax Act 1961 not having undergone any change in this regard the clarification in Circular No. 23 still prevails even after the withdrawal. No tax is therefore deductible under section 195 and consequently the expenditure on export commission payable to a non-resident for services rendered outside India is not liable for withholding tax. In the case of the assessee the applied section is Section 9(1)(i) of the Act. Therefore the above Explanation to section 9(2) is not applicable since it does not talk of clause (i) of sub-section (1) of section 9 of the Act. Therefore the decisions rendered in cases relevant to clauses other than clause (i) of Sub-section (1) of section 9 of the Act are not relevant to the present case. Otherwise too as considered hereinabove it has been held that the non-resident did not have any business connection in India and there was no liability to withhold tax u/s 195 of the Act. Moreover AO has himself accepted that payments made prior to withdrawal of the Circular do not call for any disallowance u/s 40(a)(i). The order of the ld. CIT(A) is found to be well reasoned. The department has not been able to dislodge the detailed well reasoned findings recorded therein. - Decided in favour of assessee.
Issues Involved
1. Non-deduction of tax on payments of commission to non-resident/foreign commission agents. 2. Application of Section 195 of the Income Tax Act, 1961. 3. Application of Section 9(1)(i) of the Income Tax Act, 1961. 4. Withdrawal of CBDT Circulars and its impact on tax liability. Detailed Analysis Non-deduction of Tax on Payments of Commission to Non-resident/Foreign Commission Agents The primary issue revolves around the non-deduction of tax on payments made to foreign commission agents. The Assessing Officer (AO) disallowed the payment of Rs. 63,08,727/- under Section 40(a)(i) of the Income Tax Act, 1961, due to the non-deduction of tax at source (TDS). The AO argued that the commission paid to foreign agents is deemed to accrue or arise in India, necessitating TDS as per Section 195. Application of Section 195 of the Income Tax Act, 1961 The AO contended that post-withdrawal of CBDT Circular No. 786, the income arising to foreign agents on account of export commission falls under Section 5(2)(b) of the Act, as the income had accrued in India. The AO cited the ruling in the case of S.K.F. Boilers & Driers (P.) Limited, which held that withholding tax is mandatory under Section 195 for export commission paid to non-resident agents. However, the CIT(A) found that the provisions of Section 195 were not attracted as the foreign agents did not have any business connection or permanent establishment in India. Application of Section 9(1)(i) of the Income Tax Act, 1961 The AO invoked Section 9(1)(i) of the Act, which deals with income deemed to accrue or arise in India through business connections. The CIT(A) observed that the AO failed to establish any business connection or permanent establishment of the foreign agents in India. The CIT(A) relied on multiple judicial pronouncements, including the Supreme Court's decision in CIT v. Toshoku Limited, which held that commission earned by non-resident agents for services rendered outside India cannot be deemed to accrue or arise in India. Withdrawal of CBDT Circulars and its Impact on Tax Liability The AO argued that the withdrawal of CBDT Circular No. 786 and other related circulars changed the tax liability landscape. However, the CIT(A) and various judicial precedents, including the ITAT Hyderabad's decision in DCIT v. Divi's Laboratories Ltd., held that the withdrawal of these circulars does not alter the fundamental provisions of Sections 5(2) and 9(1)(i). The CIT(A) concluded that the commission payments to foreign agents do not attract TDS under Section 195, as the agents did not have any business connection or permanent establishment in India. Conclusion The CIT(A) allowed the appeal, deleting the addition of Rs. 63,08,727/-. The CIT(A) found that the AO's reliance on the withdrawal of CBDT Circulars was misplaced and that the provisions of Section 195 were not applicable in the absence of a business connection or permanent establishment in India. The ITAT upheld the CIT(A)'s decision, confirming that the commission paid to foreign agents for services rendered outside India is not taxable in India, and thus, no TDS was required. The appeal was dismissed, affirming the CIT(A)'s well-reasoned findings.
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