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TMI Blog2018 (10) TMI 582X X X X Extracts X X X X X X X X Extracts X X X X ..... e been made to them in India. In view of the finding of the learned Commissioner appeals, we are of the opinion that the income of the foreign agents is not chargeable to tax in India, as they do not have any ‘business connection’ as per provisions of section 9 of the income tax act. In absence of any business connection, the income is not chargeable to tax under section 5 of the income tax act of the non-resident foreign agents. Thhe natural consequences is that on such payment assessee is not obliged to deduct tax at source under section 195 of the income tax act. The learned Commissioner of income tax appeals has relied upon the decision of the jurisdictional High Court EON TECHNOLOGY P. LIMITED [2011 (11) TMI 20 - DELHI HIGH COURT] wherein it has been held that when a non-resident agent operates outside the country no part of his income arises in India and since payment is remitted directly abroad and merely because an entry in the books of accounts of the assessee is made, it did not mean that non-resident has received any payment in India. Therefore, no business connection is established and income tax was not deductible at source and hence no disallowance is called for. We d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pon the decision of the coordinate bench in case of Lufthansa cargo India private limited versus DIT and also various other decisions. He further referred to the withdrawal of circular number 23 dated 23 July 1969, circular number 163 dated 29 May 1975 and circular number 786 dated 7 February 2000 and therefore according to him tax should have been deducted by the assessee at source on such foreign commission payment. He further relied upon the decision of authority for advance ruling in case of SKF Boilers and dryers private limited wherein it has been held that withholding of tax is mandatory under section 195 of the income tax act on export commission paid to non-resident agents, since commission is deemed to accrue or arise in India. He further referred to the circular number 7/2009 and based on discussion made in the assessment order held that export commission paid to the parties situated in Afghanistan by the assessee has deemed to accrue or arise in India hence it attracts the provisions of section 195 of the act. Accordingly he disallowed ₹ 44140860 paid as export commission under section 40 (a) (i) of the act and added to the total income of the assessee. Consequent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /- by way of commission paid to the following persons:- SI.No. Name of the Agent Amount of commission paid(ln Rs) 1 Mr. Atequallah 2,46,61,750 2 Mr. Amanullah 1,94,79,110 TOTAL 4,41,40,860 The Assessing Officer also noted that the appellant has not deducted tax at source on the payment of aforesaid commission. The Assessing Officer requested the appellant as to explain why the TDS was not deducted on the aforesaid payment of commission to the aforesaid persons u/s 195 of the I T Act and in the absence of any TDS, why the payment of aforesaid commission should not be disallowed u/s 40(a)(ia) of the I T Act. In reply, the appellant submitted before the Assessing Officer that the commission was paid on account of export sales and the impugned commission has been paid to the agents who happened to be nonresident/ foreign agent for services rendered by them outside India. Therefore, no income is deemed to accrue or arise to them in India. They do not have taxable income in India. Hence, provisions of Section 195 of the Income Tax Act are not applicable in their case. However, the Assessing Officer rejected the aforesaid explanation of the appellant and held that prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Act deals with the deduction of tax at source from the payments made to non-residents. The relevant extracts of section 195 of the Act are reproduced herein for the sake of ready reference:- "Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest or any other sum chargeable under the provisions of this Act (not being income chargeable under the head 'Salaries' shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force In section 195(1), the crucial expression is 'any other sum chargeable under the provisions of this Act. It would, thus, mean that the person making payment to the non-resident would be liable to deduct tax, if the payment so made is chargeable to tax under the Act. Impliedly, if the payment is not chargeable to tax under the Act, the payer would not be liable to deduct tax at source. The chargeabiiity to tax mentioned in the above provision is directly linked with section 4, which is the main charging section. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 : "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 or an agent of an independent status. Section 9, as aforesaid, creates a legal fiction and provides that certain income shall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lies only to a business activity carried out through a person acting on behalf of a non¬resident. That situation does not exist here. Now we also wish to invite your attention to the judgment of Supreme Court The Supreme Court in the case of Ishikawajima Harima Heavy Industries Limited Appeal (civil) 9 of 2007/ (SLP (Civil) No.5318 of 2005) held that in order to attract Section 195 of the Act the services rendered by the non¬resident should have been rendered in India and also should have been used in India. This twin tests has to be satisfied in order to attract Section 195 of the Act. After the decision of Ishikawajima Harima Heavy Industries Limited the Legislation amended the Explanation to Section 9(2) of the Act with retrospective effect. Despite this Amendment the Karnataka High Court in the case of Jindal Thermal Power Co. Ltd ILR 2004 KAR 3463 held that the decision rendered by the Supreme Court in the case of Ishikawajima Harima Heavy Industries Limited Bench still remains valid. We also place reliance on the following judgments: (a) The Assistant Commissioner of income Tax, Company Circle 11(1),Chennai 600034 Vs. M/s. farida Shoes Private Ltd., (b) M/s S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rify the person who is obliged to comply with sub sec (1) & to make deduction there under. Thus the obligation to deduct tax shall extend to all persons, resident or non-resident, whether or not the non-resident person has- (i) A resident or place of business connection in India; or (ii) Any other presence in any manner whatsoever in India. In a way it is only to define & clarify the opening words of sec195(1) which reads "any person responsible for paying to non resident". So it is only defining the person responsible for paying to non-resident & not the payee i.e. the non resident to whom the payment is being made. The explanation nowhere suggests anything about recipient of the payment i.e. non-resident foreign agent. More over it won't be out of context to mention *here that the amendment by Finance Act, 2012 by adding explanation 2 was a consequential amendment to cover the judgment of Supreme Court in the case of Vodafone where in they had denied the applicability of the provisions of sec 195 as the company was non-resident & having no place of business or business connection in India or another presence in any manner whatsoever in India. As such the explanation is on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y SKF Boilers and Driers Pvt. Ltd. as income accruing in India has been that the place of accrual of income is to be determine with respect to time of his accrual. While it is true that the point of time when commission arises is the time when the export of goods takes place, the AAR in SKF Boilers & Driers case erred in taking the view that even the situs of accrual of the income was the place from where the goods were exported. Under tax laws in India, it has been generally accepted that the place where the work is actually done is normally the situs of accrual of the income. For instance, in the case of salary income, the place of rendering of services is regarded as the place of accrual of income. The commission agent did not carry on any activity in India, and just the fact that the moment of accrual of income was linked to the moment of export of goods from India, did not mean that the commission income also accrued in India. The income from the export of goods was not the same as the income by way of commission. The linkage between the quantum or time of accrual between two events does not necessarily imply a linkage between the place of accrual of the two events. For instan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 s/s (1) of section 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 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 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. In the instant case, the non resident assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Mr.Amanullah. The appellant had entered into an agreement with Mr Atiquallah and Mr.Amanullah to act as intermediary for overseas sales of the product belonging to the appellant. The intermediary or the commission agents used to remit the sale considerations to the appellant net of commission. The Assessing Officer has observed in her order that the identity of the non resident commission agents are not clear in this case. However, it is noted that the aforesaid commission agents have given their complete addresses along with the copies of their passport wherein it has been recorded that they are the resident of Afghanistan. No material has been brought on record by the Assessing Officer to show that these persons are either nonexistent or imaginary persons. In the absence of any contrary material on record, it cannot be said that the identity of commission agents are not clear. Further, the copies of export bills show that the exports were made by the appellant to the parties through the non-resident commission agents and payments were made to these commission agents outside India after netting off the export bills. The Assessing Officer has not brought any material on record to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force : Explanation.-For the purposes of this section, where any interest or other sum as aforesaid is credited to any account, whether called "Interest payable account" or "Suspense account" or by any other name, in the books of account of the person liable to pay such income such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly. (2) Where the person responsible for paying any such sum chargeable under this Act (other than salary) to a non-resident considers that the whole of such sum would not be income chargeable in the case of the recipient, he may make an application to the Assessing Officer to determine, by general or special order, the appropriate proportion of such sum so chargeable, and upon such determination, tax shall be deducted under sub-section (1) only on that proportion of the sum which is so chargeable. Thus, under Section 195 of the Income-tax Act, 1961, an obligation is cast on a person making payment to a nonresident of any sum, which is chargeable under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r arise requires further elaboration. Further, Section 7 of the Income Tax Act lists the income which is deemed to be received in India and this does not include commission income. Therefore, it can also not be said that the impugned commission income has accrued or arisen to the Non Resident agents in India.The aforesaid commission payment may, however, be deemed to accrue or arise in India under - (i) section 9(1 )(i) of the Act if the commission agent has a 'business connection' in India and the income arises through such 'business connection' or (ii) section 9(1 )(vii) of the Act if the services rendered by the commission agent could be characterized as defined in Explanation 2 to that section. Provisions of section 9(1 )(i) read with explanation reveals that in case of a business of which all the operations are not carried out in India, only such part of the income as is reasonably attributable to the operations carried out in India shall be deemed to accrue or arise in India and thus be taxable in India. If no operations of the business are carried out in India, it follows that the income accruing or arising outside India through or from any business connectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eceived 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 actual or constructive in the taxable territories during the relevant accounting period. The second aspect of the same question is whether the commission amounts credited in the books of the statutory agent can be treated as incomes accrued, arisen, or deemed to have accrued or arisen in India to the non-resident assessees during the relevant year. This takes us to s. 9 of the Act. It is urged that the commission amounts should be treated as incomes deemed to have accrued or arisen in India as they, according to the department, had either accrued or arisen through and from the business 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dering the provisions of section 9(1 )(i) of the Act, held that commission paid to an agent in South Africa for distribution of the products of the applicant in South Africa was not chargeable to tax in India. On similar facts, In an another case namely Ind Telesoft P. Ltd, IN RE (543 of 2001),the AAR held that for payment of commission thereon to non-resident companies for securing business outside India, there is no liability to deduct tax at source under the Indian Income Tax 1961. It has been likewise held in the following decisions - i. DCIT vs. Angelique International Ltd. [(2013) 55 SOT 226 (Delhi)] (confirmed by the Hon'ble Delhi High court in ITA No 280/2013 dated 23.09.2013). "Commission paid to a non-resident agent for services rendered outside India is not chargeable to tax in India and that hence, no disallowance can be made under s. 40(a)(ia). Where the relationship between the assessee and its non¬resident agents is on a principal to principal basis, sales commission paid to non- residents for sen/ices rendered outside India could not be deemed to be income accrued or arise in India. " ii. ACIT vs. v'riyadarshini Spinning Mills (P.) Ltd. [2013] 55 SO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mission payment to Non resident agents for services outside India is not tax deductable at source and outside the purview of section 40(a)(ia)." v. AIA Engineering Ltd. vs. Addl. CIT (2012) 50 SOT 134 (Ahmedabad) vi. ACIT vs. Modern Insulator Ltd. [ (2011) 140 TTJ (JP) 715 vii. ACIT v. Nidhi Exports: ITA No. 626/Del./2012. viii. ACIT v. M/s Ram Gopal & Sons: 2012 (7) TMI 479 ix. ACIT v. Avon Organics Ltd.: 2012 (12) TMI 691 x. CIT vs Model Exims (2013) 358 ITR 0072 (All.) Thus, on the basis of the aforesaid decisions, the legal position which emerges is that income earned by a nonresident foreign agent for procuring orders from a source outside India cannot be deemed to be income accruing or arising in India for the purposes of section 9(1 )(i) of the Act.Therefore, I am of the opinion that the commission paid by the appellant to the agents for services rendered outside India cannot be deemed to be income which has accrued or arisen in India in terms of section 9(1 )(i) of the Act. 5.3 The A.O. has mentioned in the Assessment Order that there was liability on the appellant to deduct TDS u/s 195 from the commission paid to foreign agents as the commission inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th section 201(1 A) of the Income Tax Act. Moreover the aforesaid decision was rendered in the favour of the assessee and not in the favour of revenue. Therefore, in my opinion, the aforesaid ratio of decision in the case of Lufthansa Cargo India Pvt Ltd. (supra) is not applicable to the facts of the case of the appellant. 5.6 The A.O. has further mentioned in the assessment order that since, CBDT has withdrawn its Circular No. 23 and 786, therefore the commission remitted to non- resident to foreign agents become chargeable to tax in India. In this regard it is observed that the circulars issued by the Board were reiterating the position of law and therefore, the withdrawal of circulars does not mean that the position of law which was always there like that has undergone any change. This aspect of withdrawal of circular and its effect on the allow ability of foreign commission has been explained by Hon'ble Bangalore Bench of Tribunal in the case of Exotic Fruits Pvt. Ltd. vs. ITO [in ITA 1008 to 1013/Bang./2012, Date of order 04- 10-2013] , according to which even after the withdrawal of the said circulars, foreign agents' commissions paid in the above circumstances do not beco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... question of taxability of such commission to income tax has to be decided as per the provisions of section 9(1) of the Act. I am of considered view that the provisions of sec. 9(1) are not applicable to the commission paid to such non-resident agents. Such income (commission) in the hands of non-resident commission agents did not accrue or arise directly or indirectly, through or from any business connection in India. Such income to the non- resident commission agents did not accrue or arise in India through or from any property in India or through the transfer of capital asset situated in India. In the facts and circumstances the provisions of sec. 9(1) were not applicable to such payment of commission by appellant to non-resident agents " Para 7.7-" in the absence of permanent establishment(s) of such agents in India, the incomes of the said agents were NOT liable to be taxed in India and, as such, the assessee was not obliged to effect any deduction of tax on the commission payments made to the agents who were positioned overseas. " In another judgement, the Hon'ble Income Tax Appellate Tribunal in the case of Gujarat Reclaim & Rubber Products Ltd. vs. Addl. DIT dated 19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re not applicable to such payment of commission by appellant to non¬resident agents. " In a recent decision dated 23.05.2014, in the case of ACIT vs Rapid Pack Engineering Pvt Ltd., the Hon'ble ITAT, Mumbai, has considered the withdrawal of circular No 786 by the Circular No 7 of 2009 dated 22.10.2009, and held that the Circular No. 7 of 2009 did not have retrospective effect, even otherwise at the time of remittance of the amount in question, circular No. 786 was very much in force and existence, and the assessee cannot be expected to deduct tax at source on the commission paid to a non resident agent. In the present case also, at the time of making payment of commission circular No 786 dated 07.02.2000 was very much in existence and therefore circular No.7 of 2009 will not have any retrospective operation. Further reliance in this regard is placed on the decision of Hon'ble High Court of Delhi in the case of CIT vs Angelique International Ltd. wherein similar observations were made by the Hon'ble Court. Therefore, in my opinion, withdrawal of circular No 23 dated 23.07.1969 and circular No 786 dated 07.02.2000 will not affect the case of the appellant. 5.7 The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , not correct since the mere fact that payment is made by a person resident in India or the order is executed by a person resident in India does not result in establishment of business connection of the nonresident payee. It is also observed that the SKF Boilers ruling was decided ex-parte, without any representation from the side of the assessee and, therefore, the binding precedents, it appears, were not noticed/ considered by the AAR. It is further noticed that the rulircg of the AAR in SKF Boilers is based on the ruling in the case of Rajiv Malhotra, [(2006) 284 ITR 564 (AAR)] .According to the. A.O. the said decisions lay down that tax deduction was mandatory on export commission since commission was deemed to accrue or arise in India. Flowever, it is observed that the facts of the above ruling are entirely different from those of the appellant. In the case of Rajiv Malhotra, the commission was payable to nonresident agent for soliciting foreign participants abroad for a trade exhibition to be held in India. Therefore in view of specific provisions of s. 5(2) (b) r/w s. 9(1 )(i) as the right to receive the commission under the terms of the agency agreement had arisen in India, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esident agents and hence this expenses could not be disallowed u/s 40(a)(ia) of the Income Tax Act, 1961 .Therefore, the AO is directed to delete the impugned addition of ₹ 4,41,40,860/-." 7. In the present case, the commission is paid to the two parties for export sales. The foreign agents are non-resident and the services have been rendered undisputedly by them outside India. The commission payment was also supported by the copy of the agreement and confirmation of commission paid. The copy of the passport of the commission agents were also submitted along with the party wise and invoice wise details resulting into payment of commission. Therefore it is not the case that the payment has been made to on identified parties. Further, The revenue has not brought any material on record to show that either of these commission agents has rendered any of their services in India and the payments have been made to them in India. In view of the finding of the learned Commissioner appeals, we are of the opinion that the income of the foreign agents is not chargeable to tax in India, as they do not have any 'business connection' as per provisions of section 9 of the income tax act. In ..... X X X X Extracts X X X X X X X X Extracts X X X X
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