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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 ..... receiving the payment as the obligation to comply with sub-section (1) is on the person who has to deduct tax at source while making or crediting the payment to the account of the payee. The explanation provides that the obligation to deduct tax at source applies to all persons but it doesn t and cannot take away the fundamental requirement under law which is that the sum has to be chargeable under the provisions of the Act and therefore, only in a scenario, the sum is chargeable under the Act, the obligation is cast on all persons to deduct tax at source irrespective of the residential status or business connection or presence in India. We therefore find that reading of the said explanation by the lower authorities is not correct and only in a scenario, the payment is chargeable to tax, the tax is required to be deducted at source. Coming to the provisions of section 40(a)(ia) of the Act, the said section also provides that any interest, royalty, fees for technical services or other sum chargeable under this Act on which tax is deductible at source under chapter XVII-B and such tax has not been deducted or after deduction has not been paid on or before the due date specified in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... kindly be deleted. 2. 1,73,17,260/- 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 ₹ 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd clearly applicable in the case of the assessee. As far as the case referred by the department in ground number-4, as highlighted by the assessee are concerned, it may mentioned that the Hon`ble Tribunal has not discussed these cases while deciding appeal in favour of revenue. Hon`ble ITAT only discussed Explanation-II to the Section 195 and upheld the disallowance. The assessee has not deducted TDS on selling commission payment of ₹ 1,54,37,262/-, exhibition expenses of ₹ 17,91,586/- and testing charges of ₹ 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. ₹ 1,54,37,262/- on accoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 73,17,258/- was not chargeable to tax under I.T. Act, 1961. Therefore, I am of the considered view that the appellant was required to deduct tax at source while making payment of selling commission (1,54,37,262/-), exhibition commission (₹ 17,91,586/-) and testing expenses (₹ 88,410/-) to non-resident, whether or not the non-residents had a residence or place of business or business connection in India. The decision relied upon by the appellant are applicable only when there is evidence on record to show that the sum paid by the assessee was not chargeable to tax under the Income Tax Act. Therefore, disallowance of ₹ 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. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he effect of cl. (a) of the Explanation to cl. (i) of sub-ection (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 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. 12. The assessee further submitted a chart (at APB page 21) along with all the relevant papers and various evidences, in case of each ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment (PE) or any sort of business connection, directly or indirectly, in India 16. It was submitted that all these details and the evidences were admittedly submitted vide our letter dated 18.11.2015 to the AO and also before the ld. CIT(A) through a voluminous paper book. The AO examined the details thoroughly however, these facts evidences were neither rebutted nor disproved. Unfortunately, the ld. CIT(A) completely overlooked the same. He did not apply his mind on the factual aspects though fully established and completely lacking contrary evidences. He did not even appreciate that the onus lay upon the AO u/s 195 of the Act was not at all discharged. However, once the jurisdictional facts are not denied and duly admitted, it cannot be said that any income was chargeable to tax, accrued or arose in respect of all the three subjected payments u/s 4, 5 or 9 of the Act or 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. Moreo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd purpose of sections 9 and 195. Further, there are certain issues in respect of income deemed to accrue or arise where there are conflicting decisions of various judicial authorities. Therefore, there is a need to provide clarificatory retrospective amendment to restate the legislative intent in respect of scope and applicability of section 9 and 195 and also to make other clarificatory amendments for providing certainty in law. I. It is, therefore, proposed to amend the Income Tax Act in the following manner:- x x x x (v) Amend section 195(1) to clarify that obligation to comply with subsection (1) and to make deduction thereunder 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 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 ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y of technical services and transactions do not partakes the character of fee for technical services as explained in Section 9(ii)(vii) of the Act. Thus the commission has been paid for the services rendered outside the India. The person to whom the commission paid was not having any business connection in the India and commission so earned by him is not taxable in the India. Therefore, the provisions of Section 195 of the Act are not applicable. The Hon ble Madras High Court in its order dated 20/1/2016 in Tax case Appeal No. 484 of 2015 has held as under: 9. This question has been answered by the Hon'ble Supreme Court, in the case of G.E. India Technology Centre Pvt. Ltd. v. CIT (2010) 327 I.T.R. 456, in which, it is very categorically held that the tax deducted at source obligations under Section 195 (1) of the Act arises, only if the payment is chargeable to tax in the hands of the non-resident recipient. 9.1 Therefore, merely because a person has not deducted tax at source or a remittance abroad, it cannot be inferred that the person making the remittance, namely, the assessee, in the instant case, has committed a default in dischargi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the character of fees for technical services as explained in the context of Section 9 (1) (vii) of the Act. 12. As the non-residents were not providing any technical services to the assessee, as held above and as held by the Commissioner of Income Tax (Appeals), the commission payment made to them does not fall into the category of fees of technical services and therefore, explanation (2) to Section 9 (1) (vii) of the Act, as invoked by the Assessing Officer, has no application to the facts of the assessee's case. 13. In this case, the commission payments to the nonresident agents are not taxable in India, as the agents are remaining outside, services are rendered abroad and payments are also made abroad. 14. The contention of the learned counsel for the Revenue is that the Tribunal ought not to have relied upon the decision reported in G.E. India Technology's case, cited supra, in view of insertion of Explanation 4 to Section 9 (1) (i) of the Act with corresponding introduction of Explanation 2 to Section 195 (1) of the Act, both by the Finance Act, 2012, with retrospective effect from 01.04.1962. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppeals, 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. Thereafter, the natural consequences are 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 in 343 ITR 366 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. In view of this, we do not find any infirmity in the order of the learned first appellate authority as it followed the deci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act. The AO has given much emphasis to explanation-II to Section 195(1) of the Act. The AO also held that the payment in question is Fee for Technical Services (FTS) because the non-residents have rendered the service of managerial in the nature which falls in the ambit of definition of Fee for Technical Services U/s 9a(1)(vii) of the Act. It is pertinent to note that the provisions of Section 40(a)(i) can be applied only respect of sum payable or paid to a non-resident towards interest, royalty or Fee for Technical Services (FTS) or other sum chargeable under this Act which is payable to non-resident. For ready reference we quote the provisions of Section 40(a)(i) of the act as under:- chargeable under the head Profits and gains of business or profession ,- (a) in the case of any assessee- 42[(i)43 44any interest (not being interest on a loan issued for public subscription before the 1st day of April, 1938), royalty, fees for technical services or other sum chargeable under this Act, which is payable,- (A) outside India; or (B) in India to a non-resident, not being a company or to a f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payment of above referred expenses even, to the non-resident persons, whether or not the non-resident person had a residence or place of business or business connection in India or any other presence in any manner whatsoever in India. The explanation 2 has been inserted by the Finance Act of 2012 with retrospective effect from 01.04.1962. I am of the considered view that the argument of the appellant that since the non-resident persons whom the payments were made did not have place of business or business connection in India, therefore, the appellant was not required to deduct tax at source on the above referred payments, is not correct. Regarding the second argument of the appellant that the income of the recipients of the above referred expenses was not sum chargeable under the provisions of income Tax Act, 1961 therefore the provisions of Section 195(1) are not applicable to these payments the A/R of the appellant was specifically requested to clarify whether any ruling was obtained from the Authority for Advance Ruling u/s 245(2), regarding non taxability of the income of the recipient in India under the Income Tax Act. The A/R submitted that no such ruling was obtained from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o 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-resident in India such business income is not chargeable to tax in India. Accordingly, in the facts and circumstances of the case when the amount paid by the assessee is not chargeable to tax in India then the assessee is not liable to deduct TDS and consequently the provisions of Section 40(a)(i) of the Act cannot be invoked for making the disallowance. In the facts and circumstances of the case the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 whatsoever in India. 24. Further, the Assessing officer has placed reliance was placed on the decision of the Co-ordinate Bench decision in case of M/s Sesa Resources Ltd. (ITA No. 267-PNJ-2015 dated 20.08.2015). The ld. CIT(A) has also not disputed the nature of commission payment which have been made in respect of sales made outside of India as well as the exhibition and testing expenses. 25. Section 195 (1) provides that 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 shall deduct income tax thereon at the rates in force. Therefore, what needs to be examined in the instant case is whether the payment of commission and other charges are chargeable under the provisions of this Act. In Explanation 2, it has been clarified that the obligation to comply under sub-sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 whether such income is taxable in terms of the Income Tax Act. This aspect has not been considered by learned Tribunal while concluding that the Appellant has committed a default in not deducting the tax at source. As the said learned Division Bench Judgment was not available while passing the impugned order by the learned Tribunal, we find it appropriate, in the interest of justice, to quash and set aside the impugned order of the learned Tribunal to the extent it holds that the Appellant has defaulted in not deducting tax at source and remand the matter to the learned Tribunal to examine the said aspect afresh in the light of the judgment of this Court after hearing the parties in accordance with law. All contentions on that count are kept open. 28. Now coming to the provisions of section 40(a)( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ory 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-resident in India such business income is not chargeable to tax in India. Accordingly, in the facts and circumstances of the case when the amount paid by the assessee is not chargeable to tax in India then the assessee is not liable to deduct TDS and consequently the provisions of Section 40(a)(i) of the Act cannot be invoked for making the disallowance. In the facts and circumstances of the case the disallowance made by the AO U/s 40(a)(i) of the Act is deleted. In the result, the appeal filed by the assessee is allowed. 30. In the present case, undisputed facts are that the commission has been paid to various non-resident entiti ..... X X X X Extracts X X X X X X X X Extracts X X X X
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