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TMI Blog2018 (7) TMI 1620X X X X Extracts X X X X X X X X Extracts X X X X ..... n 194C of the I.T Act ignoring the authorities cited on behalf of the appellant against the disallowance under reference." 3. During the year under consideration, the assessee is engaged as exporter and importer of Sanitary wares & tiles and also wholesale trading of dry fruits and Kirana items. The return of income declaring total income of Rs. 98,18,474/- were electronically filed on 6/9/2011. It was processed u/s 143(1) of the Income Tax Act on 28/1/2012. The case was selected for scrutiny. Notice u/s 143(2) was issued on 3/8/2012. Subsequently, notice u/s 142(1) of the Income Tax was issued on 15/4/2013. Chartered Accountant of the assessee attended the hearing from time to time. The Assessing Officer disallowed Rs. 1,19,91,774/- by holding that since the assessee has not obtained the necessary order from his Assessing Officer before transferring the commission to Shri Sanjay Mehta in Dubai, without deduction of tax the said amount is disallowed. The Assessing Officer also disallowed Rs. 2,59,250/- in respect of payments made to Maa Bhawani Lifters u/s 40(a)(ia) of the Act for non deduction of TDS. 4. Being aggrieved by the Assessment Order, the assessee filed appeal before t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was given the explanation by the assessee in para 2.2.1 page 2 of the assessment order that commission payments to such non-residents are not taxable in India as conditions specified u/s 9(1 )(i) of the Act are not fulfilled. The AO rejected the explanation of the respondent assessee. To support the above contention the following chart will show how such a payment is not taxable in India vis a vis the non-applicability of the various sub-clauses of sec 9(1) as detailed below:- Sub-Clause of Section 9(1) of IT Act Applicability on the assessee Section 9(1)(i) This clause is applicable if the payee has earned income through business connection in India or through any property, any asset or any source of income in India or through transfer of capital asset in India. None of the Explanations 1 to 7 has application on the facts of the case. No such business connection or property or asset in India is established by the Department in the case of the payee assessee in terms of Explanation 2(Business Connection in India) and Explanation 5 & 6 (Assets and source of income in India) to sec 9(l)(i). Section 9(1)(ii) It is applicable only to payment of salaries earned in India. S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... circular 7 dt 22.10.2009 by which, the payments to Non-Residents have become taxable which was earlier exempt by virtue of old circulars. In this context it was explained that the circulars don't determine the taxability of an Income in India. If interpretation is given by a circular that interpretation should not be in conflict with the legal provision in the Act. When sec 9(1) and 9(2), keep the income to foreign agents out of the ambit of taxation in India, the circulars cannot override the provisions of law. The various authorities have considered the impact of circular No. 7 vs a vis the taxability of Non- Residents read with provisions of sec 9 of the Act. The new circular per se in the absence of any amendment cannot change the character of commission or the taxability of the same. The circulars or the absence of the circulars don't define the taxability of a particular income. The Hon'ble Supreme Court in the case Kerala Financial Corporation vs CIT 75 Taxmann 573 (SC) held that circulars cannot override or detract the provisions of law. 7. On the validity of the circular to support the addition and the relevance of circulars in general vis a vis the powers of the appel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i) Accurate Engineering Co Pvt Ltd vs DCIT ITA No.620/PN/2014 Dated 14.03.2016 (Case Law Compilation pages 49-54) 9. The AO has also relied on the ruling by the AAR in the case of SKF Boilers & Driers Pvt Ltd dated 22.02.2012 wherein it was held that after withdrawal of old circular, the tax is required to be deducted on the payments of commission to non-resident agents for supply of boilers to Pakistan. The AAR Ruling is based on the finding that the fact that the agents have rendered services abroad and commission is remitted to Act. The above finding of the AAR applying section 9(1 )(i) does not take them abroad is not relevant for determining the taxability of income in India and such commission was held to be taxable in India u/s 5(2)(b) r.w.s 9(l)(i) of the into account the inbuilt concept of existence of ' business connection' in the above section. The above finding is contrary to the decision of the Hon'ble Delhi High Court in EON Technologies P Ltd 343 ITR 366 (Case Law Compilation pages 1-6). It may also be noted that the decision of the Supreme Court in CIT Vs Toshoku Ltd 125 ITR 525 still holds ground where such payments were held to non-toxable in India in the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere on the identical facts and circumstances the payment of the foreign agency commission without deduction of withholding tax was allowed by the C Bench of the Delhi Benches of the ITAT.( Copy of both the judgments enclosed) 12. On the issue raised in the MA about the applicability of the section 40a (ia) of the Act the case of the respondent assessee is covered by the jurisdictional High Court decisions in the cases CIT Vs Rajinder Kumar 362 ITR 241 and Naresh Kumar ITA No 218/2013 dated 06.09.2013 where the Court held that after the insertion of second proviso to section 40a(ia) through Finance Act 2012 that in case of no initiation of the proceedings against the assessee by the Department u/s 201(1 A) implying that the assessee is not treated as 'assessee in default' under first proviso to section 201 (1), no addition could be made in the hands of the assessee for failure to deduct tax . The above contention is based on the premise that the above amendment in section 40a(la) is retrospective and applies to old cases also as held by the Delhi High Court in CIT Vs Ansal Landmark Township P Ltd 377 ITR 635. 7. As regards Department's appeal and Cross Objection, the Ld. AR sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of Welspun Corporation Ltd. (supra). The Tribunal in the said decision has held that the payments made by the assessee for services rendered by non-resident agents could not be held to be fees for payment for technical services. These payments were in nature of commission earned from services rendered outside India which had no tax implications in India. The Tribunal while deciding the issue has also considered the two decisions of the AAR which has been relied on by the Assessing Officer as well as the CIT(A). 21. We find the Hon'ble Allahabad High Court in the case of Model Exims (supra) has held that failure to deduct tax at source from payment to nonresident agents, who has their own offices in foreign country, cannot be disallowed, since the agreement for procuring orders did not involve any managerial services. It was held that the Explanation to section 9(2) is not applicable. It was further held that the situation contemplated or clarified in the Explanation added by the Finance Act, 2010 was not applicable to the case of the assessee as the agents appointed by the assessee had their offices situated in the foreign country and that they did not provide any mana ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re earned by the non-residents for services rendered outside India could not be deemed to be income which had either accrued or arisen in India. A credit balance, without more, only represents a debt and a mere book entry in the debtor's own books does not constitute payment which will source a discharge from the debt." 23. Similar view has been taken by the Hon'ble Madras High Court in the case of Kikani Exports Pvt. Ltd. (supra) and Faizan Shoes Pvt. Ltd. (supra). ITA No.5603/Del/2014 The Hon'ble Delhi High Court in the case of EON Technology P. Ltd. (supra) has also taken similar view where it has been held that non-resident commission agents based outside India rendering services of procuring orders cannot be said to have a business connection in India and the commission payments to them cannot be said to have been either accrued or arisen in India. In view of the decisions cited above (supra), we are of the considered opinion that the assessee is not liable to deduct tax under the provisions of section 195 of the I.T. Act on account of foreign agency commission paid outside India for promotion of export sales outside India. Accordingly, the order of the CIT(A) ..... X X X X Extracts X X X X X X X X Extracts X X X X
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