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TMI Blog2011 (2) TMI 105X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act and, therefore, there is no case for charging income tax in respect of the commission payment made by the assessee to ETUK, under section 4(1) of the Act. Sec. 195 - TDS on any Sum - held that: If the contention of the Department that the moment there is remittance the obligation to deduct TAS arises is to be accepted then we are obliterating the words “chargeable under the provisions of the Act” in section 195(1). The said expression in section 195(1) shows that the remittance has got to be of a trading receipt, the whole or part of which is liable to tax in India. The payer is bound to deduct TAS only if the tax is assessable in India. If tax is not so assessable, there is no question of TAS being deducted. (See: Vijay Ship Breaking Corporation and Others v. CIT, (2008 -TMI - 31137 - SUPREME COURT )). Commission - In “CIT v. Toshoku Limited”(1980 -TMI - 5841 - SUPREME Court)it was observed that the expression “business connection” pre-supposes that the business is carried on in India by the non-resident. The commission amounts earned by the non-resident for the services rendered outside India were held incapable of being deemed to be income accrued or arisen in India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... operation was carried out in the taxable territory of India; that receipt and right to receive being two different non interchangeable concepts, there was also no merit in the assessee s contention that the commission payment, having been remitted directly to ETUK in the UK, the same was not received in India; and that since ETUK had a business connection in India, it had earned the right to receive the income in India and such income was thus deemed to accrue or arise in India. 3. By virtue of the impugned order, the ld. CIT(A) deleted the disallowance made by the AO. 4. Aggrieved, the Department is in appeal. 5. Challenging the impugned order, the ld. DR has contended that the ld. CIT(A) has erred in deleting the addition rightly made by the AO u/s 40(a)(i) of the Act; that the ld. CIT(A) has gone wrong in relying on the decision dated 9.9.2010, of the Hon ble Supreme Court in the case of GE India Technology Centre (P) Ltd. v. CIT (copy placed on record by the assessee, at pages 29 to 33 of its paper book); that the matter stands decided in favour of the Department by the Hon ble Supreme Court in Transmission Corporation of Andhra Pradesh Ltd. v. CIT , 239 ITR 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chargeable to tax in India; that undoubtedly, CBDT Circulars are binding on the Department; that ETUK having no operations in India, the commission earned by ETUK cannot be held to be attributable, either directly or indirectly, to any operations carried on in India; that the AO brought nothing on record to show otherwise; that as such, the AO erred in holding that there was a business connection between the assessee and ETUK in India, which alleged business connection could have provided ETUK with the right to receive the income in India; that there exists a principle to principle relationship between the assessee and ETUK, due to which, ETUK has an independent status; that, therefore, there does not exist any business connection of ETUK which could have resulted any earning of income outside India; that hence, no foreign income can be deemed to accrue or arise in India; that further, ETUK is not shown to have any permanent establishment in India and so, income derived from business outside India is not assessable in India; that the ld. CIT(A) has rightly relied on GE India Technology Centre (P)Ltd. (supra); that in GE India Technology Centre (P)Ltd. (supra), it has been held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Andhra Pradesh Ltd. (supra), therein, it has been held that the provisions of section 195(1) of the Act are for tentative deduction of income tax on the sum chargeable; that the only thing required is to file an application for determination by the AO that such sum would not be chargeable to tax in the case of the recipient, or for determination of the appropriate proportion of such sum so chargeable, or for grant of a certificate authorizing the recipient to receive the amount without deduction of tax, or deduction of income tax at any lower rate; that on such determination, tax of the appropriate rate could be deducted at source; and that if no such application is filed, income tax on such sum is tobe deducted and it is the statutory obligation of the person responsible for paying such sum to deduct tax thereon before making the payment. 10. It is on the above observations of the Hon ble Supreme Court in Transmission Corporation of Andhra Pradesh Ltd. (supra), that the Department seeks to lay much stress. However, it appears that the Department has missed the fact that these observations of the Hon ble Supreme Court are based on the observations succeeding their Lordships ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is not to be deducted in computing the income chargeable as profits and gains of business or profession. 15. As per section 5 of the Act, the total income of any previous year of a person who is a resident of India includes all income from whatsoever source derived which, inter alia, - (a) is received or deemed to be received in India, or (b) accrues or arises or is deemed to be accrued or arose in India. 16. As per section 9 (1)(i), all income accruing or arising, whether directly or indirectly, inter alia, through or from any business connection in India, shall be deemed to accrue or arise in India. 17. The AO held, as discussed hereinabove, that ETUK had a business connection in India and it was through this business connection that the income accrued or arose in India. However, again, as discussed, no such business connection exists, much less is established. The operations carried out by ETUK were not carried out in India. ETUK does not have any permanent establishment in India. ETUK was acting as the assessee s marketing agent and was providing marketing and sales support to all purchases executed by the assessee company for its overseas clients. It was for the render ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... non-resident, but the person is not sure as to what should be the portion so taxable, or is not sure as to the amount of tax to be deducted; that it is in such a situation that the person is required to make an application to the ITO, TDS, for determining the amount; that it is only when these conditions are satisfied and application is made to the ITO, TDS that the question of making an order u/s 195(2) will arise; that while deciding the scope of section 195(2), it is important to note that the tax which is required to be deducted at source is deductible only out of the chargeable sum; that hence, apart from section 9(1), sections 4,5, 9, 90 and 91, as well as the provisions of the DTAA are also relevant while applying the provisions concerning tax deduction at source; that reference to the ITO, TDS u/s 195(2) or section 195(3) either by the non-resident, or by the resident payer is to avoid any future hassles for both the resident as well as the non-resident; that sections 195(2) and 195(3) are safeguards; that these provisions are of practicable importance; and that as such, where a person responsible for deduction is fairly certain, then he can make his own determination as to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eable to tax under the I.T. Act. For instance, where there is no obligation on the part of the payer and no right to receive the sum by the recipient and that the payment does not arise out of any contract or obligation between the payer and the recipient but is made voluntarily, such payments cannot be regarded as income under the I.T. Act. It may be noted that Section 195 contemplates not merely amounts, the whole of which are pure income payments, it also covers composite payments which has an element of income embedded or incorporated in them. Thus, where an amount is payable to a non-resident, the payer is under an obligation to deduct TAS in respect of such composite payments. The obligation to deduct TAS is, however, limited to the appropriate proportion of income chargeable under the Act forming part of the gross sum of money payable to the non-resident. This obligation being limited to the appropriate proportion of income flows from the words used in Section 195(1), namely, Chargeable under the provisions of the Act. It is for this reason that vide Circular No. 728 dated October 30, 1995 the CBDT has clarified that the tax deductor can take into consideration the effect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here a person responsible for deduction is fairly certain then he can make his own determination as to whether the tax was deductible at source and, if so, what should be the amount thereof. Submissions and findings thereon: 8. If the contention of the Department that the moment there is remittance the obligation to deduct TAS arises is to be accepted then we are obliterating the words chargeable under the provisions of the Act in section 195(1). The said expression in section 195(1) shows that the remittance has got to be of a trading receipt, the whole or part of which is liable to tax in India. The payer is bound to deduct TAS only if the tax is assessable in India. If tax is not so assessable, there is no question of TAS being deducted. (See: Vijay Ship Breaking Corporation and Others v. CIT, 314 ITR 309). (Emphasis supplied). 22. It is thus seen that in GE India Technology Centre (P)Ltd. (supra), the reasoning has been based on Transmission Corporation of Andhra Pradesh Ltd. (supra). Transmission Corporation of Andhra Pradesh Ltd. (supra), has thus been followed in GE India Technology Centre (P)Ltd. (supra), as rightly contended by the learned counsel for the a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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