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TMI Blog2017 (9) TMI 1794X X X X Extracts X X X X X X X X Extracts X X X X ..... s in the nature of payment by the assessee to non-residents." 2. The brief facts of the case are that the assessee who is in the trade, manufacturing and exports of shoes filed its return of income for the year under consideration at income of Rs. 2,31,93,300/-; that during the assessment stage, the AO while going through the assessee's claim of commission of Rs. 63,08,727/- as paid by the assessee to its foreign agents found that the assessee did not deduct the tax at source (TDS) on such payments; that the AO took a view that such payments in terms of sections 5(2) and 9(1)(i) of the Act were deemed to be accruing or arising in India, therefore the assessee was bound to deduct the tax at source (TDS) on such payments; that, therefore, while considering that the assessee did not deduct tax at source on such payments, the AO, disallowed the said payments u/s 40(a)(i) of the Act and accordingly addition of the amount of Rs. 63,08,727/- was made towards the assessee's income; that while making the said addition, the AO took a view that CBDT has issued Circular No.7 dated 22.10.2009 by which earlier circular No.23 dated 23 July 1969, along with Circular No. 163 dated 29th May ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... crue or arise when the right to receive it comes in existence. No doubt the agents render services abroad and have solicited orders, but the right to receive commission arises in India when the order is executed by the commission agent in India. The fact that the agents have rendered services abroad in the form of soliciting the orders and the commission is remitted to them abroad in lieu of services rendered for execution of business orders in India. Similar view has been taken by the Authority for Advance Ruling in the case of S.K.F. Boilers and Driers Pvt. Limited. In this case it has been held that withholding of tax is mandatory u/s 195 of the I. T. Act on export commission paid to a non-resident agent, since commission is deemed to accrue or arise in India. In view of the legal position mentioned above the reply of the assessee has no force, therefore, same is rejected. The case laws mentioned by the assessee in its reply are not applicable, as the position is entirely changed w.e.f 22.10.2009 i.e. after withdrawal of Circular No. 786 and other relevant circulars issued by the CBDT. Assessee has paid commission amounting to Rs. 1,09,48,085/- to a non-resident which is n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elied on certain case laws, which shall be dealt with presently. 7. We have heard the parties and have perused the material on record. 8. In the impugned order, the ld. CIT(A) has observed as follows : '10. Thus from a perusal of the facts of this appeal, submissions as made coupled with the judicial pronouncements that has been relied upon by the Ld AR, it is thus the appellant's contention that the withdrawal of the circular should not per se change or alter the provisions of relevant sections as these exist on the statute. Once the provisions of section 5(2) and section 9(l)(i) are considered in the light of the fact that these agents do not have any business connection or permanent establishment in India, therefore there could be no occasion to question the assessee's action in not deducting the tax at source as the provision of section 195 were not attracted. As observed from AO's action, it may be mentioned here that the AO has 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 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rawal of the circulars which is at question in the present appeal, it is relevant to refer here to a decision of the Hon'ble ITAT, Hyderabad Bench in the case of DCIT v. Divi's Laboratories Ltd. 131 ITD 271 (Hyd.), wherein the Hon'ble ITAT Hyderabad while considering the impact of said Circular No. 7 of 2009, has held as under- 8. We have considered the submissions of both the parties and perused the relevant material available on record. The moot question that arises out of these appeals is whether the payment of commission made to the overseas agents without deduction of tax is attracted disallowance under section 40a(ia) of the Act or not. Whether the payment in dispute made by way of cheque or demand draft by posting the same in India would amount to payment in India and consequently whether mere payment would be said to arise or accrue in India or not?. First we will take up the issue whether the payment of commission to overseas agents with out deduction of tax is attracted disallowance under section 40(a)(ia) of the Act or not. We find that the CBDT by its recent Circular No.7 dated 22nd October, 2009 withdrawn its earlier Circular Nos. 23 dated 23-7-2009, 163 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the department, are to be taken as correct, that any person making payment to a non-resident is necessarily required to deduct tax, 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 Income-tax Act by which a payer can obtain refund. As per section 237 read with section 199 of the Act implies that only the recipient of the sum i.e., payee would seek a refund. In view of the above, hence, no tax is deductible under section 195 of the Act on commission payments and consequently the expenditure on export commission payable to non-resident for services rendered outside India becomes allowable expenditure and the same is outside rigors of the section 40(a)(ia) of the Act. 11.2 While going through the afore cited decision in the case of Divi's Laboratories Ltd. (supra), wherein the Hon'ble ITAT Hyderabad has duly interpreted the import and impact of the withdrawal of the circular, it is therefore observed that the said decision is squarely covering the issue as involved in the present appeal, and on the basis of the same it is f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bsp; ** [(c) in the case of a non-resident, being a person engaged in the business of running a news agency or of publishing newspapers, magazines or journals, no income shall be deemed to accrue or arise in India to him through or from activities which are confined to the collection of news and 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 busi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evant assessment year, it had paid commission to its British parent/holding company ETUK on sales and amounts realized on export contracts procured by ETUK for assessee - Assessing Officer held that commission income earned by ETUK had accrued in India or was deemed to accrue in India and, therefore, assessee was liable to deduct tax at source there from and as there was failure, said expenditure should be disallowed under section 40(a)(ia) - Whether 7 ITA. 909/Mds/13 when ETUK was not rendering any service or performing any activity in India itself, commission income could be said to have accrued, arisen to or received by ETUK in India merely because it was recorded 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)(i), commission income could not be said to have accrued to ETUK in India and, therefore, assessee was not liable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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(l)(i) of the Act. 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 High Court was, therefore, right in answering the question against the department." 14.2 Further, subsequent to and on the lines of the aforesaid decision of the Hon'ble Apex Court, the issue of the appellant is also covered by the decision of the Hon'ble Madras High Court in the case of Faizan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase, 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(l)(i) of the Act. 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 High Court was, therefore, right in answering the question against the department. 11. The facts of the present case are akin to the facts of the decision in Toshoku Limited case, referred supra. In the instant case also the assessee engaged the services of non-resident agent to procure export orders and paid commission. That apart, the Commissioner of Income (Appeals) as well as the Tribunal have correctly applied the principle laid down in GE India Technology Cen. (P.) Ltd. case, referred supra, to hold that the assessee is not liable to deduct tax at source when the non-resident agent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the basis of which it is asserted that in case of non-resident commission agent residing in foreign countries with whom India has entered into DTAAs, the assessee was under no obligation to deduct tax at source when the non-resident commission agent provides services outside India on payment of commission. In this regard, the Hon'ble Supreme Court of India in the case of GE India Technology Center (P.) Ltd. v. CIT [2010] 327 ITR 456 (SC) 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. 18. In view of the foregoing it is thus evident that it is not the case of the AO that the foreign agents are carrying on any business activity in India. Rather, on the contrary, it is the appellant who has engaged the services of non-resident agents outside India on pure commercial and business terms ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r section 40(a)(i) of the Act could be made by the AO. In view of the same, therefore, the addition of Rs. 63,08,727/- as made by the AO on account of disallowance made u/s 40(a)(i) of the Act, is hereby deleted. Accordingly, Grounds No. 2, 3, 4 & 7 are allowed.' 9. The assessee is in the business of manufacture and export of footwear to various countries. It paid commission to non-resident commission agents for services rendered outside India. It claimed this payment as an expenditure. 10. The AO observed that on perusal of books of account of the assessee, it is seen that assessee has paid commission to a non-resident agent on exported goods amounting to Rs. 1,09,48,085/- during the year; that the Central Board of Direct Taxes has issued the Circular No.7 dated 22 October, 2009 withdrawing its Circular No. 23 dated 23th July, 1969, Circular No. 163 dated 29th May, 1975 and Circular No.786 dated 7th February, 2000, which were based on Circular No. 23; that the Circular No. 23 was issued in the context of section 9 of the I.T. Act, 1961, which deems certain incomes to accrue or arise in India for non-residents; and that in view of this, assessee should have deducted tax at so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... emitted 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(l)(i) of the Act.' 13. The assessee further relied on CIT v. Eon Technology (P.) Ltd. [2011] 15 taxmann.com 391/203 Taxman 266/343 ITR 366 (Delhi), wherein it has been held that export commission paid to non-resident was not taxable in India. 14. The assessee still further relied on the order of Mumbai ITAT in the case of Armayesh Global v. Asstt. CIT [2012] 21 taxmann.com 130/51 SOT 564, wherein it has been held that export commission earned by non-resident agent is not taxable in India. 15. The AO, however, did not agree with the stand taken by the assessee. He disallowed the assessee's claim u/s. 40(a)(i) of the Act. While doing so, he observed that the Circular No. 786 has been withdrawn, therefore, the income arising to the foreign agents on account of export commission falls u/s 5(2)(b) of the I.T. Act, as the income has accrued in India when the right to receive the income became vested; that Section 5(2)(b) of the I.T. Act deals with the scope of total income whereby the income o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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, based on the instructions of the assessee (iv) follow up in getting purchase orders from customers and forward the same to the assessee (v) follow up regarding LC opening, shipment and payment 17. Against the aforesaid services rendered, these agents raise a debit note/invoice for commission at the agreed rate and the amount is remitted through proper banking channels to their bank account in their country of residence. 18. The AO has invoked the provisions of section 5(2) and Section 9(l)(i) of the Act, however he has not dwelt beyond merely mentioning these circular without bringing anything on record about business connection or permanent establishment of such agents in India. The AO in his order has also not disputed the fact that the foreign agents are located outside India and have no permanent establishment in India. Therefore it is not a case where the non-resident agents are carrying on any business ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p; ** [(c) in the case of a non-resident, being a person engaged in the business of running a news agency or of publishing newspapers, magazines or journals, no income shall be deemed to accrue or arise in India to him through or from activities which are confined to the collection of news and 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,- (d) has and habitually exercises in India, an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was deemed to accrue in India and, therefore, assessee was liable to deduct tax at source there from and as there was failure, said expenditure should be disallowed under section 40(a)(ia) - Whether when ETUK was not rendering any service or performing any activity in India itself, commission income could be said to have accrued, arisen to or received by ETUK in India merely because it was recorded 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)(i), 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 v. Toshoku Ltd. [1980] 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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(l)(i) of the Act. 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 High Court was, therefore, right in answering the question against the department." 22. In Dy. CIT v. Divi's Laboratories Ltd. [2011] 12 taxmann.com 103/131 ITD 271 (Hyd.), it was held that the CBDT by its Circular No. 7 dated 22.10.2009 had withdrawn its earlier Circular Nos. 23 dated 23.07.2009, 163 dated 29.05.1975 and 786 dated 07.02.2000; that the earlier Circulars issued had clearly demonstrated the illustration to explain that such commission should be paid without deduction of tax; that thus, the main thrust, in such situation, is whether the commissioner paid to overseas agents, who are non-resident entities and who render services only at such particular place, is assessable to tax; that section 195 very clearly speaks that unless the income is liable to be taxed in India, there is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of India, therefore, the ld. CIT(A) rightly did not agree with the view taken by the Assessing Officer with regard to the addition made on this issue and the ld. CIT(A) was justified in directing the Assessing Officer to delete the said addition; and that after considering the totality of facts and the circumstances of the case, the order of the ld. CIT(A) on this issue was not to be interfered with and, accordingly, the same was to be upheld. 23. In Faizan Shoes (P.) Ltd. (supra), wherein also there was a similar issue of export commission being paid by a shoe manufacturer outside the India without deducting TDS thereon, the Hon'ble High Court has held as under : "10. While dealing with Section 9(1) of the Act, the Supreme Court in CIT v. Toshoku Ltd. [1980] 125 ITR 525 (SC), on considering a transaction where tobacco was exported to Japan and France and sold through non-resident assessees who were paid commission, held as under: 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the facts of the decision in Toshoku Limited case, referred supra. In the instant case also the assessee engaged the services of non-resident agent to procure export orders and paid commission. That apart, the Commissioner of Income (Appeals) as well as the Tribunal have correctly applied the principle laid down in GE India Technology Cen. (P.) Ltd. case, referred supra, to hold that the assessee is not liable to deduct tax at source when the non-resident agent provides services outside India on payment of commission". 24. Regarding AO's reliance on SKF Boilers it is observed that the same is not found to be applicable as the said ruling was in respect of an entity based in Pakistan with which India did not have any treaty or DTAA, whereas in the present appeal, the assessee has made its submission with regard to the treat provisions as existing vide the DTAAs entered into by India with the countries i.e. Italy, USA and UK wherein the commission agents reside. 25. The decision of the Authority for Advance Rulings in the case of SKF Boilers & Driers (P.) Ltd. (supra) has considered its earlier decision in the case of Rajiv Malhotra, In re [2006] 155 Taxman 101/284 ITR 564 (A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s holding their withdrawal. Thus, in respect of cases, which directly follow with the situations covered by the circulars, the liability to tax should continue to be in accordance with section 9 of the Act and its intent. The relevant sections, namely section 5(2) and section 9 of the Income-tax Act, 1961 not having undergone any change in this regard, the clarification in Circular No. 23 still prevails even after the withdrawal. No tax is therefore deductible under section 195 and consequently, the expenditure on export commission payable to a non-resident for services rendered outside India is not liable for withholding tax. 29. It is seen that the ld. CIT(A) has duly taken into consideration the above facts and circumstances besides the case laws. 30. Then, also for A.Y. 2011-12, a similar disallowance was made, which was deleted (APB 76-86) by the CIT(A) and the department did not file any appeal against the CIT(A)'s order. 31. Apropos, Circulars of CBDT, in Kerala Finance Corpn. v. CIT [1994] 75 Taxman 573/210 ITR 129 (SC), the Apex Court has stated that the circular issued by CBDT under section 119 of the Act cannot override or detract the provisions of the Act. Thus, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee is not allowable expenditure under section 40(a)(i) of the Act. The Commissioner of Income Tax (Appeals) elaborately considered this issue and held that sales commission paid by assessee is not chargeable to tax in India as the services were rendered outside India by non-residents and therefore, provisions of section 195 have no application so as to disallow commission payments under section 40(a)(i) of the Act. While holding so, the Commissioner of Income Tax (Appeals) considered various decisions on the issue including the decision of Hon'ble Supreme Court in the case of GE India Technology Centre (P.) Ltd. (supra). The Commissioner of Income Tax (Appeals) in one of the case before us in K.H. Arind Pvt. Ltd. following the decision of the co-ordinate Bench of this Tribunal in the case of Farida Shoes (P.) Ltd. (supra) deleted the disallowance observing as under:- ** & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 v. Model Exims [2014] 42 taxmann.com 446/222 Taxman 94/363 ITR 66 (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 not applicable to the present case, as in the present case the agents appointed by the assessee had their offices situated in a foreign country and that they did not provide any managerial services to the assessee; that section 9(1)(vii) deals with technical services and has to be read in that context; that the agreement of procuring orders would not involve any managerial services; that the agreement did not show the applicability or requirement of any technical expertise as functioning as selling agent, designer or any other technical services; and that therefore, the Tribunal has rightly deleted the disallowance. 35. Coming to the case laws relied on by the department in the following cases, it has b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aised 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 India or any business connection in India. Therefore, Performing Right Society (supra) is also not applicable to the facts of the present case. 39. Otherwise too, it is seen that the decisions relied on by the ld. DR pertain to clauses (vi) and (vii) of section 9(1) of the Act. In this regard, it is seen that an Explanation was inserted in Section 9(2) of the Act, by substitution, with retrospective effect from 01.06.1976. This Explanation reads as follows: "Explanation. - For the removal of doubts, it is hereby declared that for the purposes of this section, income of a non-resident shall be ..... X X X X Extracts X X X X X X X X Extracts X X X X
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