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TMI Blog2020 (11) TMI 479X X X X Extracts X X X X X X X X Extracts X X X X ..... e is no income chargeable to tax in India in terms of section 195(1) of the Act in the hands of the non-resident agents and accordingly, the provisions of section 195(2) of the Act would not come into operation at all. Reliance in this regard had been rightly placed by the Ld. CIT(A) on the decision of Hon ble Apex Court in the case of GE Technology Center Pvt.Ltd. [ 2010 (9) TMI 7 - SUPREME COURT ] wherein held The parties merely source the prospective buyers for effecting sales by the assessee, and is analogous to a land or a house / real estate agent / broker, who will be involved in merely identifying the right property for the prospective buyer / seller and once he completes the deal, he gets the commission. Thus, by no stretch of imagination, it cannot be said that the transaction partakes the character of fees for technical services as explained in the context of Section 9(1)(vii) of the Act. 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 Sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he decision rendered thereon would apply with equal force for AY 2014-15 also, except with variance in figures. 3. The first identical issue to be decided in this appeal is as to whether the Ld.CIT(A) was justified in deleting the disallowance made u/s 40(a)(i) of the Act in the sum of ₹ 4,18,50,792/- u/s 195 of the Act in the facts and circumstances of the case. 4. We have heard the rival submissions and perused the materials available on record. We find that assessee is engaged in the business of trading activity of import and export of pharmaceutical ingredients, chemicals and intermediates. We find that the assessee debited a sum of ₹ 4,18,50,792/- in its profit and loss account towards export commission paid to overseas agents, who arrange for exports and procure export orders for the assesse. The assessee pleaded that these overseas agents are not having any permanent establishment (PE) in India and are residents of the respective foreign countries. The Ld. AO did not heed to this contention of the assessee and proceeded to invoke the provisions of Sec. 40(a)(i) r.w.s 195 of the Act stating that the said payment required to be subjected to deduction of tax at sour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e case of CIT vs Orient express reported in 330 taxmann.com 602 (f) Decision of Hon ble Madras High Court in the case of CIT vs Farida Leather company reported in 238 taxmann.com 473 (g) Decision of co-ordinate bench of this Tribunal in the case of ACIT vs Pahilajarai Jaikishan reprted in 157 ITD 1187 (Mum Trib.) 6. It is not in dispute that the non-resident agents to whom commission was paid by the assessee have rendered services outside India for sale of the goods of the assessee outside India. It is not in dispute that the said non-resident agents do not have any PE in India and that they are domiciled in U.K and USA. In view of these facts, it could be safely concluded that there is no income chargeable to tax in India in terms of section 195(1) of the Act in the hands of the non-resident agents and accordingly, the provisions of section 195(2) of the Act would not come into operation at all. Reliance in this regard had been rightly placed by the Ld. CIT(A) on the decision of Hon ble Apex Court in the case of GE Technology Center Pvt.Ltd. in 327 ITR 456 (supra), wherein the head notes of the said decisions are reproduced hereunder:- Section 195 of the Income-tax Act, 1961 - Ded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 00,73,432.00 12,01,469.00 2%. The assessee had duly submitted copies of agency agreement/contract and exclusivity agreement pertaining to 4 major overseas agents based in USA Europe as well copies of ledger account of these agents. The four foreign agents to whom aforesaid payment of commission of ₹ 1.68 crore were made are as under: Sr. No. Name of the company Name of the country 1 Regal Rank Ltd UK 2 SRK Pharmachemie (Europe) GmBH . Germany 3 NJK Holdings LLC , USA 4 Roscio Alassandro Italy The Revenue is not doubting the genuineness of these commissions to overseas agents which was claimed by assessee as business expenses u/s 37(1) as that part of appellate order holding the issue in favour of the assessee has attained finality as Revenue has not challenged the said part of finding of learned CIT(A). The Revenue is mainly aggrieved in this appeal by infringement of Section 195(2) read with Section 40(a)(i) of the 1961 Act. It is also explained by the assessee that it is into exports of pharmaceutical products and intermediaries due to which it has to incur high cost of registration involved for registering itself in foreign countries being new company abroad. The assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to value and volumes are fixed for overseas agents to get commission and in case the performances are not forthcoming, the assessee will not be liable to pay these commissions. Thus, these commissions paid to overseas agents are linked to performance by way of export orders generated or import of raw material etc facilitated for the assessee. The assessee was new to export business and as this being the first year of exports , hence the assessee was required to get registration done with various authorities/agencies in foreign countries . The said overseas agents assisted assessee in getting itself registered and undertook work for marketing and sales of assessee s products for which necessarily expenses were incurred by these overseas agents but the pith and substance of the agency agreement and the work performed in substance was to generate export orders and to facilitate imports of the products dealt in by the assessee and the work of registration of the assessee with various authorities/agencies in foreign country or to undertake marketing and sales promotion was all incidental to generating export orders or facilitating imports for the assessee. The commission certainly was h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l, it appears that the Revenue only contended that the payee in question had rendered technical services in the nature of systematic research to the appellant and received fee in lieu thereof, which was liable to be taxed as per Article 13 (Clause 4) of the Indo-Italian Double Taxation Avoidance Agreement (DTAA). 20. The learned Tribunal took note of the agreement between the appellant and the payee which, inter alia, provided as follows: The SECOND PARTY agrees to undertake and carryout the following services on behalf of the FIRST PARTY: 1. To procure orders for the FIRST PARTY and to negotiate the terms of such orders and contracts with said foreign buyers but the terms thereof shall be subject to prior, written concurrence of the FIRST PARTY. 2. To carry out systematic market research with regard to the needs of the products in the territory and to send to the FIRST PARTY reports and suggestions for adopting necessary measure in order to increase sale of the products. 3. To co-ordinate with the FIRST PARTY for the timely completion of all export obligations and to render all assistance in the fulfillment of the terms of the supply contract. 4. To take all necessary efforts and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n being covered by the judgment of Supreme Court in Toshoku Ltd., supra. The issue before the learned Tribunal was whether the appellant/assessee had paid for systematic research or for procuring export orders. It was all along the contention of the appellant/assessee that the foreign agent was paid for procuring orders and assessing the market. The learned Tribunal erred in concluding that there was no issue between the parties that the assessee had paid for systematic research. For the sake of convenience, the second, the third and the fourth questions are dealt with together. 24. The learned Tribunal found, on facts, on perusal of the agreement copies filed by the appellant/assessee that commission was paid to the foreign agents for (i) marketing the products of the assessee company; (ii) to procure orders for the assessee company; and (iii) for systematic market research with regard to the needs of the products, etc. 25. There is no factual finding of any activity on the part of the payee in India. The Assessing Officer proceeded on the basis that the business of the appellant/assessee was in India and payments were made from India. 26. Having found that the payments were for m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arising through or from business connection in India Liability to tax Section 9 of the Income Tax Act, 1961 . 29. From the Service Agreement with the agents abroad, it is clear that the service rendered is essentially brokerage service. The very first clause of the agreement states to procure orders . The reference to market research abroad or co-ordination with the supplier or to ensure timely payment or making available its office space for visit by the suppliers, were ordinarily things which any agent or broker undertook incidental to brokerage service. 30. There is no finding that any of the commission agents had any place of business in India. Explanation 1 to Section 9(1)(i) of the IT Act would attract liability to Indian tax for a non-resident with business connections in India, only in respect of income attributable to his operations in India. In this case, there is nothing which shows that the income in question was attributable to operations in India. That was not even the factual finding of the Assessing Officer. The Assessing Officer proceeded on the basis that the situs of the rendering of services was not relevant. It was only the situs of the payer and the situs of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e purposes of making or earning any income from any source outside India. In view of Explanation (2) to Section 9(1)(vii), technical services means any consideration, including lumpsum consideration, for rendering of any managerial, technical or consultancy services, including the provision of services of technical or other personnel, but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient. Service of market survey only to ascertain the demand for the product in the market is incidental to the function of a commission agent of procuring orders and is, in any case, not managerial, technical or consultancy service. 34. In GE India Technology Centre P. Ltd., supra, the Supreme Court clearly held that no tax is deductible under Section 195 of the IT Act on commission payments and consequently the expenditure on export commission payable to non-residents for services rendered outside India becomes allowable expenditure. In Toshoku Ltd., supra, the Supreme Court held that payments to agents for performance of services outside India are not liable to be taxed in India. 35. In CIT v. EON Technology (P.) Ltd. [2011] 15 Taxmann.co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Hon ble Madras High Court has referred to decision of Hon ble Supreme Court in the case of GE Technology Centre Private Limited v. CIT (2010) 327 ITR 456(SC) , wherein Hon ble Supreme Court held that what is relevant is the sum chargeable to income-tax under the provisions of the 1961 Act before provisions for deduction of income-tax at source u/s 195 come into service. Thus merely because the assessee has not made an application u/s 195(2), it will not bring the said sum chargeable to income-tax which otherwise is not chargeable to income-tax within provisions of the 1961 Act and provisions of Section 40(a)(i) cannot be invoked to disallow the expenses. The assessee in any case has produced before the AO form no. 15CA and 15CB certified by CA that no income tax was required to be deducted on these commissions paid to overseas agents and it is not shown by the AO as to how the said sum is chargeable to incometax within provisions of the 1961 Act . The taxes can be levied and collected only under authority of law (Art. 265 of Constitution of India). It is for the Revenue to show that as to how the said sum is chargeable to income-tax under the provisions of the 1961 Act. Secondly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to foreign agents of ₹ 1,20,72,972/-? B. *** 2. Question A pertains to disallowance made by the Assessing Officer under section 40(a)(ia) of the Income-tax Act, 1961 ['the Act' for short] for the failure of the assessee to deduct tax at source on exemption paid to foreign agents. This issue has been considered in Tax Appeal No. 1232 of 2018 in following manner: 1. The issue arises in relation to assessment year 2011-12. During the course of assessment proceedings, the Assessing Officer noticed that the assessee had paid payment of ₹ 1.20 crore (rounded off) to non-resident out of the total commission of ₹ 1.49 crores (rounded off) paid during the year. On such commission paid to non-residents, the assessee had not deducted any tax at source. The Assessing Officer therefore, inquired with the assessee, who responded by suggesting that all services were rendered by the nonresidents outside India and therefore, no part of the income had accrued or arose in India. Such income was therefore, not taxable in India. The assessee relied on the decision of Supreme Court in case of GE India Technology Center P. Ltd v. Commissioner of Income Tax and anr reported in 32 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... operty 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 shall be deemed to accrue or arise in India. 6. In the present case, as noted, admitted facts are that the non-resident agents appointed by the assessee for procuring export orders do not have permanent establishment in India. Their agents are situated outside India. Their activities as commission agents are being carried out outside India. The Tribunal therefore correctly held that there was no liability on the assessee to deduct tax at source. Merely because a portion of the sale to the overseas purchasers took place in India, would not change situation vis-avis the commission agents. 7. In the result, Tax Appeal is dismissed. 3. This question is therefore not entertained. Attention is also drawn to decision of Hon ble Gujarat High Court in the case of PCIT v. Nova Technoplast Private Limited (2018) 94 taxmann.com 322(Guj.) , wherein Hon ble Gujarat High Court held as under:- Revenue is in appeal against the judgment of the Income Tax Appellate Tribunal, Rajkot Bench dated 28th August 2017, raising the following question for our consideration :- Wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -residents in respect of services rendered abroad and the non-residents has not carried any business operation in India, therefore, we find that the assessee is not liable to deduct tax at source. We have also noticed that the assessing officer has not controverted the claim of the assessee that commission was paid to non-residents in respect of services rendered abroad. After looking to the fact as stated supra and judicial finding, we consider that disallowance of commission paid to the aforesaid nonresidents under the above circumstances is not appropriate under the provisions of Section 40(a)(ia) of the Act. Therefore, the appeal of the revenue is dismissed. 4. It can thus be seen that while confirming the order of CIT [A], the Tribunal relied on judgment of the Supreme Court in the case of G.E India Technology Centre (P.) Ltd. v. CIT [2010] 7 taxmann.com 18/193 Taxman 234/327 ITR 456 (SC). In such judgment, it was held and observed that the most important expression in Section 195 [1] of the Act consists of the words, chargeable under the provisions of the Act . It was observed that, ..A person paying interest or any other sum to a nonresident is not liable to deduct tax if su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 961 Act, no disallowance u/s 40(a)(i) is warranted, by holding as under:- 2.4 Aggrieved over the order of the Income Tax Appellate Tribunal, the Revenue has preferred this Appeal, raising the following substantial questions of law:- 1. Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that no disallowance can be made as per Section 40(a)(i) of the Act with respect to payment of commission to non-resident foreign agents without deduction of tax at source? 2. Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that the disallowance cannot be made by following the decision G.E India Technology Cen. (P.) Ltd., v. CIT [2010] 327 ITR 456 (SC), inspite of insertion of Explanation 4 to Section 9(1)(i) and Explanation 2 to Section 195(1) of the Act, which was introduced by Finance Act, 2012, w.e.f. 01.04.1962 to overcome the said judgment? 3. Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that the income of the payee, the foreign agent, is not taxable in India inspite of insertion of Explanation below Section 9(2) of the Act, which was introduced by Finance Act, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orrect, is the issue to be decided. 7. In order to appreciate this contention, it is necessary to consider the relevant provisions of the Act:- (i) Section 40(a)(i) of the Act :- Section 40 - Amounts not deductible: Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head Profits and gains of business or profession , - (a) in the case of any assessee - (i) any 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 foreign company, on which tax is deductible at source under Chapter XVIIB and such tax has not been deducted or, after deduction, has not been paid on or before the due date specified in sub-section (1) of section 139: Provided that where in respect of any such sum, tax has been deducted in any subsequent year, or has been deducted during the previous year but paid after the due date specified in sub-section (1) of section 139, such sum shall be all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cash or by the issue of a cheque or draft or by any other mode : Provided further that no such deduction shall be made in respect of any dividends referred to in section 115-O. [Explanation 1] :............... [Explanation 2.- For the removal of doubts, it is hereby clarified that the obligation to comply with sub-section (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 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. Explanation 4 to Section 9 (1) (i) of the Act:- Section 9 - Income deemed to accrue or arise in India - (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 4.- For the removal of doubts, it is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase, 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 the basis that the payer has an obligation to deduct tax a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... v. Kikani Exports (P.) Ltd. [2014] 369 ITR 96/[2015] 232 Taxman 255/49 taxmann.com 601 (Mad.) 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 atract 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. The aforesaid judgment of Hon ble Madras High Court in the case of Farida Leather Company (supra) directly covers the dispute between rival parties. The ..... X X X X Extracts X X X X X X X X Extracts X X X X
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