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TMI Blog2019 (9) TMI 764X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Act of Rs. 1,73,17,260/- on account of non-deduction of TDS for payment made to non-resident having no PE. The disallowance so made & confirmed by the ld. CIT(A), is contrary to the provisions of law and facts. 3. 23,54,230/- : The ld. CIT(A) erred in law as well as on the facts of the case in confirming charging of interest u/s 234B & 234C of the Act. The appellant totally denies it liability of charging of any such interest. The interest, so charged, being contrary to the provisions of law and facts, kindly be deleted in full." 3. In ITA No. 23/JP/2019 for A.Y 2014-15, the assessee has taken the following grounds of appeal as under: "1. The impugned additions and disallowance made in the order u/s 143(3) dated 17.12.2016 are bad in law and on facts of the case, for want of jurisdiction and various other reasons and hence the same kindly be deleted. 2. 1,94,35,485/- The ld. CIT(A) erred in law as well as on the facts of the case in confirming the disallowance u/s 40(a)(ia) r.w.s 195 of the Act of Rs. 1,94,35,485/- on account of non-deduction of TDS for payment made to non-resident having no PE. The disallowance so made & confirmed by the ld. CIT(A), is contrary to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng commission payment of Rs. 1,54,37,262/-, exhibition expenses of Rs. 17,91,586/- and testing charges of Rs. 88,410/- paid to non-resident. As per section 195 of the Act, the assessee was liable to make the above payment after making TDS. But the assessee has failed to do so. ....................x x x x x........................... Considering the amended provisions of section with insertion of Explanation-II with retrospective effect from 01.04.1962, the assessee was required to deduct TDS from selling commission, exhibition expenses and testing expenses paid to non-residents. Since the assessee failed to deduct TDS therefore as per provisions of section 195 read with section 40(a)(ia) the expenses of Rs. Rs. 1,54,37,262/- on account of selling commission, Rs. 17,91,586/- on account of exhibition expenses and Rs. 88,410/- on account of testing expenses paid to non-residents cannot be allowed. Thus Rs. 1,73,17,258/- are disallowed u/s 40(a)(ia) and hereby added to the total income of the assessee." 7. Being aggrieved, the assessee carried the matter in appeal before the ld. CIT(A) who has since confirmed the addition and the relevant findings read as under: "I have gone t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ow that the sum paid by the assessee was not chargeable to tax under the Income Tax Act. Therefore, disallowance of Rs. 1,73,17,258/- made by the AO is hereby confirmed." 8. Against the aforesaid findings, the assessee company is in appeal before us. During the course of hearing, the ld AR submitted that the crux of various judicial pronouncements is that before applying Section 195, it was obligatory on the part of the Assessing officer to establish beyond all reasonable doubts that the subjected payments were taxable under the provision of the Income Tax Act, 1961, then only it could be said that tax at source was deductible w.r.t. such payment/s. In other words, Section 195 r/w 40(a)(ia) of the Act could be invoked only if the subjected payment/s are found to be a sum chargeable under the provisions of this Act but not otherwise. In the context of Section 195 of the Act which deals with the liability of the payer to deduct tax at source on the specified payment/s made to a non-resident, such payment/s can be said to be sum chargeable under the provisions of this Act only if it is established that such payment was taxable u/s 4, 5 and 9 of the Act. 9. It was further submitted t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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." 12. The assessee further submitted a chart (at APB page 21) along with all the relevant papers and various evidences, in case of each of the payees as under: * Copies of Ledger account of the payee in the books of assessee, * Agency agreement (providing for rendering of services out of India only. * Certificate of the payee (to the effect that they had no PE in India u/s 6 r/w 9 of the Act nor any business connection/activity in India), * Foreign bills transaction advice, * Letter by the assessee to the concerned bank with enclosure to make payment outside India. It was submitted that the above sets of papers were made available to the lower authorities, in case of all the parties to whom the subjected amount of commission has been paid and are also available, in the pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under any other provisions of the Act in India. Thus, it is not a case where non-resident agents are carrying out any business activity in India as enumerated in Explanation 2 to Section 9(1) and consequently there is no business connection between the assessee and the Non-Resident Payees. Moreover, all the countries of the respective payees and India have already entered into DTAAs providing the taxing of the income, if any, in the hands of the concerned payee. Thus, it is fully established that the subjected amounts so received by the respective payees, were not the income chargeable to tax in India in any manner whatsoever, hence s. 195 of the Act was not applicable in this case. 17. It was further submitted that even Explanation 2 to S. 195 is not applicable in the instant case. It was submitted that the AO has completely misread and misapplied Explanation-2 in as much as S.195 of the Act requires "Any person responsible for paying...." Any person includes all the persons be a resident or non-resident as defined u/s 2(31) of the Act. Therefore, even a non-resident person responsible for paying to a non-resident was liable to deduct TDS u/s 195 however, certain judicial pronou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... non-resident has:- (a) a residence or place of business or business connection in India; or (b) any other presence in any manner whatsoever in India. These amendments will take effect retrospectively from 1st April, 1962 and will accordingly apply in relation to the assessment year 1962-63 and subsequent assessment years." Thus, the Explanation 2 does not at all positively say that despite the fact that income of the non-resident payee is not chargeable to tax in India yet however, S.195 shall applies on the payer resident. 18. Further, reliance was placed on the Co-ordinate Bench decision in case of M/s Classic Enterprises Ltd. Vs. JCIT (in ITA No. 808/JP/2014 dated 21.12.2016) wherein it was held as under:- "2. In respect of ground No.1 of the assessee's appeal, briefly the facts of the case are that a disallowance of Rs. 4,40,820/- has been made by the AO u/s 40(a)(ia) of the IT Act on account of non deduction of TDS u/s 195 of the Act on commission paid to two foreign parties. Undisputedly, the commission has been paid to two foreign parties outside India on account of sales orders procured by them for the assessee. The orders were obtained by them from outside Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the remittance, namely, the assessee, in the instant case, has committed a default in discharging his tax withholding obligations because such obligations come into existence only when the recipient has a tax liability in India. 9.2 The underlying principle is that, the tax withholding liability of the payer is inherently a vicarious liability on behalf of the recipient and therefore, when the recipient/ foreign agent does not have the primary liability to be taxed in respect of income embedded in the receipt, the vicarious liability of the payer to deduct tax does not arise. This vicarious tax withholding liability cannot be invoked, unless primary tax liability of the recipent/foreign agent is established. In this case, the primary tax liability of the foreign agent is not established. Therefore, the vicarious liability on the part of the assessee to deduct the tax at source does not exist. 10. Further, just because, the payer/assessee has not obtained a specified declaration from the Revenue Authorities to the effect that the recipent is not liable to be taxed in India, in respect of the income embedded in the particular payment, the Assessing Officer cannot proceed on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ised in this case has been the subject matter of the decision, in the recent case, reported in (2014) 369 I.T.R. 96 (Mad) (Commissioner of Income Tax v. Kikani Exports Pvt. Ltd.) wherein the contention of the Revenue has been rejected and assessee has been upheld and the relevant observation reads as under:- "... the services rendered by the non-resident agent could at best be called as a service for completion of the export commitment and would not fall within the ] definition of "fees for technical services" and, therefore, section 9 was not applicable and, consequently, section 195 did not come into play. Therefore, the disallowance made by the Assessing Officer towards export commission paid by the assessee to the non-resident was rightly deleted." 16. When the transaction does not attract the provisions of Section 9 of the Act, then there is no question of applying Explanation 4 to Section 9 of the Act. Therefore, the Revenue has no case and the Tax Case Appeal is liable to be dismissed. 17. In the result, this Tax Case Appeal is dismissed. The order passed by the Income Tax Appellate Tribunal is confirmed." Considering the decision of the Hon'ble Madras High Court and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... missioner appeals. Accordingly, we direct learned assessing officer to delete the disallowance of Rs. 4,41,40,860/- on account of commission paid to foreign agent who did not render any services in India." 21. Further, reliance was placed on the Co-ordinate Bench decision in the case of Satyam Polyplast vs. DCIT, Circle-04, Jaipur (ITA No. 158/JP/2019 dated 14.05.2019) wherein it was held as under:- "5. We have considered the rival submissions as well as the relevant material on record. The assessee has paid commission to non-resident persons against the service of procuring orders for the assessee. The details of the commission paid by the assessee are as under:- S. No. Name of Agent Address Commission 1. Mr. Claudio Haberl A/c AV. Sesquicentenario 4540 CP1613, Buenos Aires, Argentina 22,06,46,7.00 2. Md. Habibur Rahman Kalibarl, Azizabad, Patharghata Barguna 3,31,442.00 3. Nadia Anwar hasan Ali AL-Shekh, Othman, Snafer Building Yemen 4,68,120.00 4. Reinhard Bosse UND Geschaftskunden Ag, Bahnhofstrabe 17,49525 Lengerich, Germany 7,10,060.00 5. Shamlan Naseer Ali Doha, Qatar, YEMEN 1,76,698.00 Total 38,92,787.00 The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ature of service rendered by the non-resident. Even otherwise the issue of FTS has to be considered in light of definition provided in respect the DTAA. We find that the ld. CIT(A) for the assessment year 2013-14 has clearly given a finding that the payment in question is not fee for technical services but it is a regular payment to the non-resident in the nature of ordinary course of business. Even otherwise the ld. CIT(A) has upheld the order of the AO only on the ground that as per the explanation-II of Section 195(1) of the Act the assessee was under obligation to deduct the tax at source for making the payment of commission to non-resident. Therefore, the ld. CIT(A) has accepted the nature of payment as commission and not fee for technical service. The relevant finding of the ld. CIT(A) in para 4.3 as under:- "4.3 I have gone through the assessment order, statement of facts, grounds of appeal and written submissions carefully. It is seen that the AO after discussing the provisions of Section 195, including the Explanation 2, has concluded that the appellant was required to deduct the tax at source while making the payment of above referred expenses even, to the non-resident ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deemed to be received in India accrues or arises or is deemed to accrue or arise to him in India during such year. For ready reference we quote to Section 5(2) reproduced as under:- "5(2) Subject to11 the provisions of this Act, the total income12 of any previous year of a person who is a non-resident includes all income from whatever source derived which- (a) is received14 or is deemed to be received in India in such year by or on behalf of such person ; or (b) accrues or arises14 or is 14deemed to accrue or arise to him in India during such year. Explanation 1.-Income accruing or arising outside India shall not be deemed to be received14 in India within the meaning of this section by reason only of the fact that it is taken into account in a balance sheet prepared in India. Explanation 2.-For the removal of doubts, it is hereby declared that income which has been included in the total income of a person on the basis that it has accrued15 or arisen15 or is deemed to have accrued15 or arisen15 to him shall not again be so included on the basis that it is received or deemed to be received by him in India. Therefore, commission paid to non-resident outside India for the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... services for earning commission income by the non-resident has been rendered outside of India. It was further submitted that the exhibition expenses have been incurred in respect of participation in various exhibition outside of India and the testing charges were paid to non-resident for getting the samples/goods tested outside India. We therefore find that the Assessing Officer has not disputed the nature of the payments so made by the assessee to the non-resident entities and also the fact that the services have been rendered outside of India and the payment have been made outside of India. The only reason why the Assessing officer has disallowed these expenses is in view of the Explanation 2 to Section 195 which reads as under:- "Explanation 2 - For the removal of doubts, it is hereby clarified that the obligation to comply with sub section (1) and to make deduction there under applies and shall be deemed to have always applied and extends and shall be deemed to have always extended to all persons, resident or non-resident, whether or not the non-resident person has (i) a residence or place of business or business connection in India; or (ii) any other presence in any manner w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the such non-resident is chargeable to tax in India. "Person", here, will take its meaning from section 2 and would include all persons, whether resident or non-resident. Therefore, a non-resident person is also required to deduct tax at source before making payments to another non-resident, if the payment represents income of the payee nonresident, chargeable to tax in India. There are no other conditions specified in the Act and if the income of the payee non-resident is chargeable to tax, then tax has to be deducted at source, whether the payment is made by a resident or a non-resident." 27. Further, regarding the decision of the Co-ordinate Bench in case of M/s Sesa Resources Ltd (supra) relied upon by the Assessing Officer, we find that the same has been set aside by the Hon'ble Bombay High Court (Tax Appeal No. 11 of 2016 dated 07th March, 2016) wherein it was held as under:- "8. With regard to substantial question of law referred to above, we find that in the judgment of the learned Division Bench in the case of Gujarat Reclaim & Rubber Products Ltd (supra) it has been, inter alia, held that before effecting deduction at source one of the aspects to be examined is whet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accruing or arising outside India shall not be deemed to be received14 in India within the meaning of this section by reason only of the fact that it is taken into account in a balance sheet prepared in India. Explanation 2.-For the removal of doubts, it is hereby declared that income which has been included in the total income of a person on the basis that it has accrued15 or arisen15 or is deemed to have accrued15 or arisen15 to him shall not again be so included on the basis that it is received or deemed to be received by him in India. Therefore, commission paid to non-resident outside India for the services rendered outside India will not fall in the category of the income received for deemed or received in India as well as accrues or arises or is deemed to accrue or arise in India. Thus, the said amount paid to non-resident does not fall in the scope of total income of non-resident and consequently it is not chargeable to tax in India under the provisions of the Act. Even otherwise the said income in the hands of non-resident has to be considered in the light of the provisions of DTAA between India and the Country of the non-resident. In the absence of P.E. of the non-resi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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