2011 (1) TMI 1332 - AT - Income Tax

TDS u/s 195 - Commission paid to the foreign agent for procurement of Export Order - non-deduction of TDS - effect of withdrawal of circulars - HELD THAT - Reliance was placed on the decision of Dy.CIT vs. M/s.Siemens Aktiengeselschaft 2009 (12) TMI 952 - ITAT, MUMBAI as held while deciding a similar issue, the Tribunal held that it is axiomatic that a circular in operation through the relevant assessment year cannot be held to be inoperational simply by reason of the fact that it has been withdrawn in the year 2009 - issuance of circular no.7 of 2009 withdrawing the circular no.23 of 1969, 163 of 1975 and 786 of 2000 will be operative only from 22.10.2009 and not prior to that date. Thus, the withdrawal of earlier circulars with effect from 22.10.2009 has no bearing in the instant case. It is worth mentioning that the previous year involved in 2006- 07 relevant to the assessment year under consideration. At the relevant time, in view of the C.B.D.T. circular No.23 dated 23.7.1969 and circular no.786 dated 7.2.2000, the assessee was not obliged to deduct the tax under Section 195 of the Act and the circular No.7 of 2009 dated 22.10.2009 withdrawing the circular No.23 of 1969 and circular No.786 of 2000 will be operative only from 22nd October, 2009 and not prior to that date. Decision relied upon by the AO in the case of Van Oord ACZ India (P.) Ltd. 2007 (11) TMI 332 - ITAT DELHI-D has been overruled by Hon'ble Delhi High Court 2010 (3) TMI 167 - DELHI HIGH COURT as concluded that Obligation to deduct tax at source u/s 195 is attracted only when the payment is chargeable to tax in India; IT authorities having accepted that the non-resident recipient is not liable to pay any tax in India, the assessee- payer was not liable to deduct tax at source under s. 195(1) in respect of the mobilization and demobilization costs reimbursed by it to the said non-resident company. Decided against revenue.

Summary

Issues: Disallowance of commission on export for non-deduction of TDS under Section 195 of the Income-tax Act, 1961

Analysis:

Issue 1: Disallowance of Commission
The Revenue appealed against the order of the Ld.CIT(A)-II, Kanpur deleting the addition of Rs. 24,42,737 on account of commission paid to a foreign agent for procurement of Export Order. The Revenue contended that the Ld.CIT(A)-II erred in law by not appreciating the facts presented during the assessment proceedings. The Revenue also argued that the Ld. CIT(A)-II ignored the judgments of the Hon'ble Supreme Court in CIT Vs Gold Coin Health Food Pvt.Ltd. and CIT Vs. Moser Baer India Ltd. The AO disallowed the commission under Section 40(a)(i) of the Act for non-deduction of tax at source under Section 195.

Issue 2: Arguments Before CIT(A)
The assessee argued before the ld.CIT(A) that the commission paid to the foreign agent was not taxable under Section 9 of the Act as the income did not accrue or arise in India. The assessee relied on CBDT circulars to support the non-deduction of tax at source under Section 195. The ld.CIT(A) agreed with the appellant, stating that the withdrawal of earlier circulars had no bearing on the assessment year in question. The ld.CIT(A) deleted the disallowance under Section 40(a)(i) of the Act.

Issue 3: Tribunal's Decision
The Tribunal upheld the ld.CIT(A)'s decision, emphasizing that circulars in force during the relevant assessment years are to be applied, and subsequent circulars have no retrospective effect. The Tribunal cited precedents to support its decision, including the Hon'ble Bombay High Court's ruling in BASF (India) Ltd. vs. W.Hasan,CIT. The Tribunal also referenced the decision in the case of M/s. Siemens Aktiengesellschaft, where it was held that the withdrawal of circulars would be effective only from the date of withdrawal. The Tribunal concluded that the assessee was not liable to deduct tax at source under Section 195, and the appeal filed by the Revenue was dismissed.

In conclusion, the Tribunal's decision favored the assessee, ruling that the commission paid to the foreign agent was not taxable in India and therefore not subject to TDS under Section 195. The judgment highlighted the importance of applying circulars in force during the relevant assessment years and upheld the principle that subsequent circulars do not have retrospective effect.