9911796707
Advanced Search 
TMI Blog2018 (4) TMI 1564X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee, who is engaged in trading, manufacturing and export of shoes, had filed its return of income for the year under consideration at income of Rs. 1,64,73,630/-. During the assessment proceedings, the AO had made an addition of Rs. 70,54,210/- in respect of commission paid by the assessee to foreign agents. While making the said additions, the AO was of the view that the CBDT has issued Circular No.7 dated 22.10.2009, by which, earlier Circulars No.23 dated 23 July 1969, Circular No.163 dated 29th May 1975 and Circular No. 786 dated 7th February 2000, which were based on Circular No.23, have been withdrawn. According to the AO Circular No.23 was issued in the context of Section 9 of the Income Tax Act, which deems certain income to accrue or arise in India for non-residents. Thus, according to the AO, in view of this, assessee should have deducted tax at source. The AO further held that post withdrawal of Circular No.786, the income arising to foreign agents on account of export commission falls u/s 5(2) (b) of the Income-tax Act, as the income had accrued in India when the right to receive the income became vested. The AO also held that the position has entirely changed after ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as subjected the payment of commission to TDS provisions only after the cut off date of 22.09.2009, the date on which the Circular no. 7 of 2009 got operational, meaning thereby he has disallowed payments of commission for the period 22.09.2009 to 32.03.2010, and for the period prior to it he has allowed the appellant's claim in respect of payments made before the said date and has thus accepted appellant's claim of such payments considering the same to be complying to the section 5(2) or section 9 of the Act. Therefore, while considering so, I find that the issue as emerging and. requiring adjudication therefore is whether the appellant is liable to deduct tax at source (TDS) on the payments made to non resident agent(s) in a situation which is subsequent to the withdrawal of the said circular and whether the disallowance made in respect of the payment made to foreign commission agents amounting to Rs. 70,54,210/- u/s 40(a)(i) in view of provisions of section 195 of the Act is called for or not. Further, two important aspects that need further elucidation in the appellant's case i.e. whether there exists any business connection of the agents or whether such agents do maintain any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... May, 1975 and 786 dated 7-2-2000. The earlier circulars issued by the CBDT have clearly demonstrated the illustrations to explain that such commission payments can be paid without deduction of tax. Thus, the main thrust in such a situation is whether the commission made to overseas agents, who are nonresident entities, and who render services only at such particular place, is assessable to tax. Section 195 of the Act very clearly speaks that unless the income is liable to be taxed in India, there is no obligation to deduct tax. Now, in order to determine whether the income could be deemed to be accrued or arisen in India, section 9 of the Act is the basis. This section, in our opinion, does not provide scope for taxing such payment because the basic criteria provided in the section is about genesis or accruing or arising in India, by virtue of connection with the property in India, control and management vested in India, which are not satisfied in the present cases. Under these circumstances, withdrawal of earlier circulars issued by the CBDT has no assistance to the department, in any way, in disallowing such expenditure. It appears that an overseas agent of Indian exporter opera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he provisions of section 5(2) and section 9 has not undergone any change. 14. However, before proceeding further, it may be worthwhile to refer to the provisions of sec 9 (1) (i) of the Act, and to see that commission payments could be subject to tax by the AO or not. The AO in order to bring said commission payments within the ambit of TDS provisions has invoked Section 9(1 )(i) of the Act. The relevant extract of section 9(1)(i) is reproduced as under: "9. (1) the following incomes shall be deemed to accrue or arise in India:- (i) all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situate in India. [Explanation 1], For the purposes of this clause - 1. in the case of a business of which all the operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India; 2. in the case of a non-resident, no income sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 or an agent of ah independent status". 15. As regards the import of section 9 (1)(i) of the Act in terms of business connection, the Hon'ble Delhi High Court in the case of CIT v. EON Technology (P) Ltd, reported at 343 ITR 366 while dealing with payment of commission by the said assessee company to its parent company i.e. ETUK of UK which was located outside India has held that the commission payment to its British parent/holding company ETUK could not said to have been accrued to ETUK in India and therefore, the assessee was not liable to deduct tax at source from payment of commission to ETUK. The head note of order is reproduced hereunder: "Section 9 of the Income-tax Act, 1961 - Income - Deemed to accrue or arise in India Assessment year 2007 -08 - Assesseecompany was engaged in business of development and export of software - During relevant assessment year, it had paid commission to jts British parent/hold ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f C.l.T. vs. Toshoku Limited, reported at 125 ITR 525 (SC), wherein the Hon'ble Apex Court while dealing with the twin aspects of the situation in the case of the assessee before it, as to 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, has opined 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, since 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 secure discharge from the debt. They cannot, therefore, be charged to tax on the basis of receipt of income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ia shall be only such part of the income as is reasonably attributable to the operations carried out in India. If all such operations are carried out in India, the entire income accruing there from shall be deemed to have accrued in India. If however, all the operations are not carried out in the taxable territories, the profits and gains of business deemed to accrue in India through and from business connection in India shall be only such profits and gains as are reasonably attributable to that part of the operations carried out in the taxable territories. If no operations of business are carried out in the taxable territories, it follows that the income accruing or arising abroad through or from any business connection in India cannot be deemed to accrue or arise in India (See CIT v. R. D. Aggarwal & Co. [19651 56 ITR 20 (SC) and Carborandum Co. v. CIT [19771 108 ITR 335 (SC) which are decided on the basis of s. 42 of the Indian I. T. Act, 1922, which corresponds to s. 9(1 )(i) of the Act). In the instant case, the non-resident assessees did not carry on any business operations in the taxable territories. They acted as selling agents outside India. The receipt in India of the sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me Court of India as rendered in the case of GE India Technology Center (P.) Ltd. v. CIT (2010) 327 ITR 456 (SC), wherein it has held as under - Where the income is not chargeable to tax, there is no question of deducting tax at source. In the instant case, the commission paid by the assessee (appellant) to his agent is not chargeable to tax in India. Therefore, the assessee was not liable to deduct tax at source on the said payments. Since, the income of foreign agents is outside the purview of section 9, consequently section 195 of the Act will not come into play. In view of the foregoing it is thus evident that it is not the case of the AO that the foreign agent as such is carrying on any business activity in India. Rather, on the contrary, it is the appellant who has engaged the services of the non-resident agent outside India on pure commercial and business terms to propagate and co-ordinate its sales outside Indian Territory. Thus, it is unambiguously evident that the provisions of clause (i) of section 9(1) or section 195 are not attracted in this case. 21. It is pertinent to note that as regards the said claim of payments towards commission as made to the foreign ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 's decision in the case of Faizan Shoes and Hon'ble ITAT Hyderabad's decision in the case of Divi's Laboratories Ltd (supra), wherein it is duly shown that without the existence of business connection or permanent establishment, and/or with the withdrawal of circular, the provision of section 9(1)(i) or section 5(2) have not undergone any change, as a result of which the commission income of these agents does not get taxable in India. Therefore, due to the non-existence of any permanent establishment or any business connection which is indeed a pre-requisite for holding that the income does accrue or arise in India, and on that basis without correctly invoking the provisions of section 5(2) or 9(1)(i) of the Act, the appellant cannot be asked to deduct tax at source either under the Income-tax Act or the treaty provisions as per the existing DTAAs entered into by India with Spain, France, Germany and UK. Therefore in view of the above, I find that the appellant is correct in its approach in not deducting tax at source on the payment of commission made to foreign commission agents. While finding that the appellant was not liable to deduct tax at source on the payments of commission ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agent has carried out all his activities outside India, did not render any service in India and did not have Permanent Establishment (PE) in India; that residing in the foreign countries with whom India has entered into a DTAA and under the Article 7 of the said DTAA, the income received is being taxed in their hands in their country; that the assessee has remitted payments to them outside India through proper banking channels; that these agents have carried out business activity of procurement of export orders and timely realization of payments for the assessee outside India; that as the income received by these agents is business income, the same cannot be taxed under the Income-tax Act 1961 in the absence of business connection and permanent establishment in India; that these non resident commission agents offer to tax the income received on account of the transactions with the assessee as their business income in their country of residence; and that the role and responsibilities of these agents are as under - (i) to procure orders from buyers (ii) to negotiate price and other terms and intimate the same to the assessee (iii) to re-negotiate the terms/price if necessary, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd views in India for transmission out of India, (d) in the case of a non-resident, being- (1) an individual who is not a citizen of India; or (2) a firm which does not have any partner who is a citizen of India or who is resident in India; or (3) a company which does not have any shareholder who is a citizen of India or who is resident in India, no income shall be deemed to accrue or arise in India to such individual, firm or company through or from operations which are confined to the shooting of any cinematograph film in India, Explanation 2. - For the removal of doubts, it is hereby declared that "business connection" shall include any business activity carried out through a person who, acting on behalf of the non-resident,- (a) has and habitually exercises in India, an authority to conclude contracts on behalf of the non-resident, unless his activities are limited to the purchase of goods or merchandise for the nonresident; or (c) has no such authority, but habitually maintains in India a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the non-resident; or (d) habitually secures orders in India, mainly or wholly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rded in books of assessee in India or was paid by assessee situated in India - Held, no - Whether for applying section 9 Assessing Officer was required to examine whether said commission income was accruing or arising directly or indirectly from any business connection in India - Held, yes - Whether since facts found by Assessing Officer did not make out a case of business connection as stipulated in section 9(1)(0, commission income could not be said to have accrued to ETUK in India and, therefore, assessee was not liable to deduct tax at source from payment of commission to ETUK - Held, yes [In favour of assessee]." 21. In " CIT vs. Toshoku Limited", 125 ITR 525 (SC), the Hon'ble Apex Court while dealing with the twin aspects of the situation in the case of the assessee before it, as to 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, has opined as under : "It cannot be said that the making of the book entries in the books of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out genesis or accruing or arising in India, by virtue of connection with the property in India, control and management vested in India, which were not satisfied in the instant cases; that under these circumstances, withdrawal of earlier circulars issued by the CBDT had no assistance to the department, in any way, in disallowing such expenditure; that it appeared that an overseas agent of Indian exporter operated in his own country and no part of his income arises in India and his commission is usually remitted directly to him by way of TT or posting of cheques/demand drafts in India and, therefore, the same is not received by him or on his behalf in India and such an overseas agent is not liable to income-tax in India on those commission payments; that section 195 has to be read along with the charging sections 4, 5 and 9; that one should not read section 195 to mean that the moment there is a remittance, the obligation to deduct TDS automatically arises; that if such contention was to be accepted, it would mean that on mere payment in India, income would be said to arise or accrued in India; that if the contentions of the department were to be taken as correct that any person, ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss connection in India that existed between the non-resident assessees and the statutory agent. This contention overlooks the effect of cl. (a) of the Explanation to cl. (i) of sub-s. (1) of s. 9 of the Act which provides that in the case of a business of which all the operations are not carried out in India, the income of the business deemed under that clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India. If all such operations are carried out in India, the entire income accruing therefrom shall be deemed to have accrued in India. If however, all the operations are not carried out in the taxable territories, the profits and gains of business deemed to accrue in India through and from business connection in India shall be only such profits and gains as are reasonably attributable to that part of the operations carried out in the taxable territories. If no operations of business are carried out in the taxable territories, it follows that the income accruing or arising abroad through or from any business connection in India cannot be deemed to accrue or arise in India (See CIT v. R. D. Aggarwal & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot take into account the factual and legal matrix, in which the AAR has held that "in the instant case, the non-resident assessees did not carry on any business operations in the taxable territories. They acted as selling agents outside India. The receipt in India of the sale proceeds of tobacco remitted or caused to be remitted by the purchasers from abroad does not amount to an operation carried out by the assessees in India as contemplated by cl.(a) of the Explanation to s.9(1)(i) of the Act". 26. The AO completed assessments under section 143(3) for the assessment year 2011-12 and 2012-13 wherein the learned Assessing Officer has not made any disallowance in respect of the payment of commission to the foreign agents residing in the country, with which India has entered into DTAA. 27. Apropos AO's contention that the CBDT, vide circular No. 7 dated 22.10.2009, had withdrawn its Circulars Nos. 23 dt. 23.07.69, 163 dt. 29.05.1975 nd 786 dt. 07.02.2000, which were based on Circular No. 23; that the Circular No. 23 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 sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it has been held as under : 8. We have heard both the parties and carefully perused the materials available on record. From the facts of the case, it is evident that the assessee has made payments to commission agents located in foreign countries. These foreign agents have rendered services in their respective countries and had received the commission. It is also evident that the foreign agents did not have any PE in India and there was nothing brought on record to show that the agreements between the assessee & commission agents were entered in India. In these circumstances the decision rendered in the case of Toshuku Ltd. (supra) is squarely applicable considering the acts of the case before us. In this case the Hon'ble Apex Court held that the commission agents, who are engaged in the service executed outside India, cannot be considered to carry on any business operations in India and therefore, the provisions of section 9(1)(i) of the Act and Explanation 1A will not be applicable. Similarly, the Hon'ble Apex Court, in the case of GE India Technology Cen. (P) Ltd (supra) has held that the expression "chargeable under the provisions of the Act in section 195(1)" shows that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on to its non resident agents for the services rendered by them outside India and the sales commission is not chargeable to tax in India so as to deduct TDS in such payments under section 195 of the Act. Therefore, respectfully, following the decision of the Hon'ble Supreme Court in the case of GE India Technology Centre (P) Ltd (supra) and the above cited decision of the coordinate bench of this Tribunal, we sustain the order of the Commissioner of Income Tax (Appeals) in deleting the disallowance made under section 40(a)(i) of the Act. In assesse's case also these facts are comparable with the decision of the Apex Court and other decisions cited above. The commission amounts which were earned by the non-resident assessees for services rendered outside India cannot, therefore, be deemed to be incomes which have either accrued or arisen in India. The said decision of Supreme Court takes into consideration the principles of income deemed to accrue or arise in India and outside India." 34. In "CIT vs. Model Exims, (2014) 42 taxmann.com 446 (All.), it has been held to the effect that the fact situation contemplated or clarified in the Explanation added by the Finance Act, 2010 is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... where the amount is actually paid, is not acceptable as section 40(a)(ia) covers not only those cases wh3ere the amount is payable, but also when it is paid. The applicability of this decision to the facts of the present case, has not been made out. 38. In "Performing Right Society", 1976 AIR 1973 (SC), the issue related to payment of royalty, which falls u/s. 9(1)(vi) of the Income-tax Act and on this single score, this decision is not applicable to the facts of the present case, since the question herein is with regard to applicability of section 9(1)(i) of the Act. Further, the question raised before the Hon'ble Supreme Court in that case was that since the agreement was executed in England and the royalty was payable in England, no income accrued or arose in India. In the present case, on the other hand, it remained undisputed by the authorities below, that the recipient of the commission paid by the assessee had rendered their services for the procurement of export orders and the realization of the payments for the assessee outside India. It is nowhere the case of the authority below or of the department before us, that these agents have any Permanent Establishment in Indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ual property rights. The services rendered by the assessee also included registration and enforcement of intellectual property rights abroad as well and for that purpose, the assessee had availed services of the entities based abroad. The assessee did not deduct any tax from the payments made to such foreign entities and contended that since the payments were made for the professional services, the same could not be covered by the connotations of the expression 'fees for technical services' under section 9(1 )(vii). In the case of the assessee, the commission agents have not provided any consultancy and as such, on facts, 'Ess Vee Intellectual Property' (Supra), is not applicable. 2. 'Maharashtra State Electricity Board vs. DCIT', (2004) 90 ITD 793 (Mum.). In the facts of that case, the position of the law has been settled by the decision of the Hon'ble Supreme Court in the case of 'G.E. India Technology Centre (P) Ltd. vs. CIT' (2010) 193 Taxman 234 (SC), wherein it has been held that section 195 casts an obligation on the payer to deduct tax at source from payment made to non-residents, which payments are chargeable to tax. Therefore, where the sum paid or credite ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... passed by the Authority for Advance Ruling, New Delhi, in AAR No.833 of 2009 (Copy placed on record) relates to applicability of Section 9(1)(vi). Again, this decision too is not applicable in the facts of the present case. 12. In view of the above, following our aforesaid decision in the case of 'M/s Nuova Shoes, Agra', the grievance sought to be made out by the Department is rejected as without merit and the well reasoned order of the ld. CIT(A) is confirmed." 13. The Grounds in the present case, but for the amount involved, are exactly same. The CIT(A)'s order herein, too, is, mutatis mutandis, verbatim the same. Therefore, 'M/s Nuova Shoes' (supra) and 'Virola International' (supra), are squarely applicable. In view thereof, the case laws relied on by the Department are of no help to it. Thus, following 'M/s Nuova Shoes' (supra) and 'Virola International' (supra), the grounds raised by the Department are rejected. The Department has not been able to controvert the well reasoned findings of the ld. CIT(A). The order under appeal is, accordingly, confirmed. I.T.A No. 434 /Agra/2015 14. The issue involved in this appeal by the Department for A.Y. 2011-12 is exactly the same ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
