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TMI Blog2011 (11) TMI 20X X X X Extracts X X X X X X X X Extracts X X X X ..... reme 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. - Income Tax Appeal No. 1167/2011 - - - Dated:- 8-11-2011 - MR. JUSTICE SANJIV KHANNA, MR. JUSTICE R. V. EASWAR, JJ. For Appellant: Mr. Sanjeev Sabharwal, Advocate. For Respondent: Mr. Salil Aggarwal and Mr. Prakash Chand, Advocates. SANJIV KHANNA, J. Revenue in the present appeal under Section 260A of the Income Tax Act, 1961, (Act, for short) has raised the following substantial question of law:- Whether Income Tax Appellate Tribunal has erred in upholding the order of the CIT(A) deleting the addition of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to receive the income from ET India, i.e. the assessee. Since such receipts situs/origin in India, this portion of income becomes liable to be taxed in India. It shall not out of place to mention that the place of accrual of income is the place where right to receive that income arises with the corresponding liability of the prayer to make the payment of the same there. The assessee s statement that since no operation/business are carried out in the taxable territories of India then the income accruing abroad through on any business connection in India cannot be deemed to accrue or arising in India, does not hold any water as the source of such income arising to ETUK is its business connection with the assessee company in India i.e. the source is situate wholly and completely within territories of India. Another contention of the assessee regarding that that this commission payment is remitted directly to ETUK and is therefore not received in India is also not tenable since receipt and right to receive are two distinct concepts both of which cannot be used interchangeably. Here the ETUK may not have received the amount in India but due to its business connection in India, ETUK has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of a person on the basis that it has accrued or arisen or is deemed to have accrued or arisen to him shall not again be so included on the basis that it is received or deemed to be received by him in India. 8. It is apparent from the Section 5(2) of the Act that total income of previous year of a person, who is a non-resident, is chargeable to tax in India if it is received or is deemed to be received in India or accrues or arises or is deemed to accrue or arise to him in India. Explanation 1 to the said section stipulates that income accruing or arising outside India shall not be deemed to be received in India within the meaning of the said section by reason of the fact that it is taken into account in the balance sheet prepared in India. Explanation 1 is a complete answer to the observations of the Assessing Officer that commission income had accrued, arisen or was received by ETUK in India because it was recorded in the books of respondent assessee in India or was paid by the respondent assessee situated in India. This aspect has been also examined below while dealing with the question of deemed accrual. 9. Section 9 of the Act postulates and states when income is deemed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... abitually maintains in India a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the non-resident; or (c) habitually secures orders in India, mainly or wholly for the non-resident or for that non-resident and other non-residents controlling, controlled by, or subject to the same common control, as that non-resident: Provided that such business connection shall not include any business activity carried out through a broker, general commission agent or any other agent having an independent status, if such broker, general commission agent or any other agent having an independent status is acting in the ordinary course of his business: Provided further that where such broker, general commission agent or any other agent works mainly or wholly on behalf of a non-resident (hereafter in this proviso referred to as the principal non-resident) or on behalf of such non-resident and other non-residents which are controlled by the principal non-resident or have a controlling interest in the principal non-resident or are subject to the same common control as the principal non-resident, he shall not be deemed to be a broker, general commission agent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d charges payable to such a non-resident for services rendered outside India. 12. On the said aspect we may refer to the decision of the Supreme Court in C.I.T. vs. Toshoku Limited, (1980) 125 ITR 525 (SC). This case relates to the assessment year 1962-63. The Indian assessee had paid commission to two foreign companies through whom they had procured export orders. Questions arose; what was the effect of the entries in the books of accounts of the Indian assessee which had resulted in debit and credit entries on account of commission and secondly, whether procurement of export orders by the foreign companies for the Indian company had resulted in a business connection. Two contentions were rejected by the Supreme Court inter-alia recording as under:- It cannot be said that the making of the book entries in the books of the statutory agent amounted to receipt by the assessees who were non-residents as the amounts so credited in their favour were not at their disposal or control. It is not possible to hold that the non-resident assessees in this case either received or can be deemed to have received the sums in question when their accounts with the statutory agent were credited ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gains and some activities in India, which contributes directly or indirectly to the earning of those profits or gains. It predicates an element of continuity between the business of the non-resident and the activity in India [CIT Vs. R.D. Aggarwal and Company (1965) 56 ITR 20 (SC), Carborandum Co. Vs. CIT (1977) 2 SCC 862 and Ishikawajma-Harima Heavy Industries ltd. Vs. Director of income Tax, Mumbai (2007) 3 SCC 481]. The test which is to be applied is to examine the activities in India and whether the said activities have contributed to the business income earned by the non-resident, which has accrued, arisen or received outside India. The business connection must be real and intimate from which the income had arisen directly or indirectly. The question of business connection, therefore, has to be decided on facts found by Assessing Officer (or in the appellate proceedings). In the present case, facts found by the Assessing Officer do not make out a case of business connection as stipulated in Section 9(1) (i) of the Act. There is hardly any factual discussion on the said aspect by the Assessing Officer. He has not made any foundation or basis for holding that there was busine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the amount paid, which bears the character of income such as salaries, dividends, interest on securities, etc. but the said provisions also apply to gross sums, the whole of which may not be income or profits in the hands of the recipient, such as payment to contractors and sub-contractors. 62. The purpose of TDS provisions in Chapter XVII-B is to see that the sum which is chargeable under Section 4 for levy and collection of income tax, the payer should deduct tax thereon at the rates in force, if the amount is to be paid to a non-resident. The said TDS provisions are meant for tentative deduction of income tax subject to regular assessment. (See Transmission Corpn. of A.P. Ltd. v. CIT, SCC pp. 273-74, para 10 : ITR pp. 594-95.) (emphasis supplied) It was thereafter lucidly clarified:- 73. On the question as to whether there is any interlinking of the charging provisions and the machinery provisions under the 1961 Act, we may, at the very outset, point out that in CIT v. B.C. Srinivasa Setty this Court has held that: 10. the charging section and the computation provisions together constitute an integrated code. When there is a case to which the computation provision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies . Similarly, Section 195 imposes a statutory obligation on any person responsible for paying to a non-resident any sum chargeable under the provisions of the Act , which expression, as stated above, does not find place in other sections of Chapter XVII. It is in this sense that we hold that the IT Act constitutes one single integral inseparable code. Hence, the provisions relating to TDS applies only to those sums which are chargeable to tax under the IT Act. 18. If the contention of the Department that any person making payment to a non-resident is necessarily required to deduct TAS then the consequence would be that the Department would be entitled to appropriate the monies deposited by the payer even if the sum paid is not chargeable to tax because there is no provision in the IT Act by which a payer can obtain refund. Section 237 read with Section 199 implies that only the recipient of the sum i.e. the payee could seek a refund. It must therefore follow, if the Department is right, that the law requires tax to be deducted on all payments. The payer, therefore, has to deduct and pay tax, even if the so-called deduction comes out of his own pocket and he has no remedy wha ..... X X X X Extracts X X X X X X X X Extracts X X X X
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