TaxTMI 
TaxTMI 
2011 (2) TMI 105
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....and marketing support management operations, for which, ETUK was to invest in and operate the sales and marketing operations from the U.K. The AO was, however, of the opinion that the commission payment ought to have been subjected to TDS. This having not been done, the AO made disallowance u/s 40(a)(i) of the Act. While doing so, the AO observed that ETUK being the sole selling and marketing agent for the assessee, it was rendering the services of the sale agent, thereby enabling it to earn the right to receive the income from the assessee; that since the situs or origin of the receipt was in India, the income was liable to tax in India; that the right to receive the income in India and , therefore, the place of accrual of income, was in India; that it was a corresponding liability of the payer, i.e., the assessee, to make the payment of the amount at the place of accrual of the income, i.e., India; that the source of income arisen to ETUK was its business connection with the assessee company in India and so, there was no force in the assessee's stand that the income accruing or arising abroad through any business connection in India cannot be deemed to accrue or arise in India si....
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....K rendered services to the assessee company outside India; that undeniably, the assessee company stands incorporated in India and it had its operations in India during the year ; that there is nothing on record that ETUK had rendered services in India; that the contract between the assessee company and ETUK was itself entered into, since the assessee was not in a position to interact and set up sales and marketing support management operations in the assessee's clients' locations, for which it was, that ETUK was to invest in and operate the sales and marketing operations from the UK; that this fact stands noted in the assessment order itself; that the commission paid does not constitute or give rise to any income chargeable in India, either under the Indian Income Tax Act or under the provisions of the Indo-UK DTAA; that as such, no tax was deductible regarding the commission paid u/s 195 of the I.T. Act; that that being so, no disallowance ought to have been made u/s 40(a)(i) of the Act; that otherwise too, according to the CBDT Circular No. 786 dated 7.2.2000 (241 ITR 132 Statute) and CBDT Circular No. 23 dated 23.7.69, commission paid to non-resident Indians for the services ren....
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....t's appeal, which does not carry any merit whatsoever. 7. We have heard the parties and have perused the material on record. The facts are not in dispute. The only issue is as to whether the ld. CIT(A) has correctly deleted the disallowance made by the AO regarding the commission paid by the assessee to ETUK without making TDS. ] 8. As per the contract agreement between the assessee and ETUK, since the assessee was not in a position to interact and set up a sales and marketing support management operations in the clients' locations, ETUK was to invest and operate the sales and marketing operations from UK. Thus, ETUK rendered services to the assessee company outside India. That being so, it cannot be said that there was any right to receive income earned in India, or that there was any business connection between the assessee and ETUK. The AO did not bring anything on record to show that any service was performed by ETUK in India. Pertinently, the CBDT Circulars considered by the ld. CIT(A) are to the effect that commission paid to nonresidents for services rendered outside India are not chargeable to tax in India. The Circulars are binding on the Department. 9. Ap....
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....ich is chargeable u/s 4 of the Act. TDS is to be made on 'such sum', i.e., the sum chargeable u/s 4 of the Act. The application required to be filed before the AO is for determination as to whether 'the whole of such sum' would not be chargeable to tax in the case of the recipient. As per "Transmission Corporation of Andhra Pradesh Ltd. "(supra), if no such application is filed, TDS is to be made on "such sum". 12. Therefore, the pre-requisite is the chargeability of the sum u/s 4 of the Act. If the sum is, at the outset, not chargeable to tax, there is obviously no question of making TDS thereon. In the words of "Transmission Corporation of Andhra Pradesh Ltd. "(supra), "if the sum that is to be paid to the non-resident is chargeable to tax, tax is required to be deducted." 13. Section 4(1) of the I.T. Act lays down that where any Central Act enacts that income tax shall be charged for any assessment year at any rate or rates, income tax at that rate or those rates shall be charged for that year in accordance with and subject to the provisions of the I.T. Act. 14. As per section 40(a)(i) of the Act, any sum chargeable under the I.T. Act, which is payable ou....
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....isallowance u/s 40(a)(i) of the Act. 20. The contention of the Department is that in the absence of filing an application for determination by the AO that such sum would not be chargeable to tax in the case of the recipient, the payer cannot be permitted to contend that the payment made to the non-resident did not give rise to income chargeable in India and that, therefore, there was no need to deduct TDS. It is this the very contention which has been considered by the Hon'ble Supreme Court in "GE India Technology Centre (P)Ltd." (supra). It was held therein, inter alia, that a person paying the sum to a non-resident is not liable to deduct tax, if such sum is not liable to tax under the I.T. Act. It was noted that in "CIT v. Cooper Engg.", 68 ITR 457(SC), it was pointed out that if the payment made by the resident to the non-resident was an amount which was not liable to tax in India, then no tax is deductible at source, even though the assessee had not made any application u/s 195(2) of the I.T. Act [ then section 18(3B)] of the I.T. Act. It was observed that the application of section 195(2) presupposes that the person responsible for making the payment to the no....
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....n any person responsible for paying to a nonresident any interest (not being interest on securities) or any other sum(not being dividend) chargeable under the provisions of the I.T. Act, to deduct income tax at the rates in force unless he is liable to pay income tax thereon as an agent. Payment to non-residents by way of royalty and payment for technical services rendered in India are common examples of sums chargeable under the provisions of the I.T. Act to which the aforestated requirement of tax deduction at source applies. The tax so collected and deducted is required to be paid to the credit of Central Government in terms of Section 200 of the I.T. Act read with Rule 30 of the I.T. Rules, 1962. Failure to deduct tax or failure to pay tax would also render a person liable to penalty under section 201 read with section 221 of the I.T. Act. In addition, he would also be liable under section 201(1A) to pay simple interest at 12 per cent per annum on the amount of such tax from the date on which such tax was deductible to the date on which such tax is actually paid. The most important expression in Section 195(1) consists of the words "chargeable under the provisions of the Act". ....
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....ection 195(2) will arise. In fact, at one point of time, there was a provision in the I.T. Act to obtain a NOC from the Department that no tax was due. That certificate was required to be given to RBI for making remittance. It was held in the case of Czechoslovak Ocean Shipping International Joint Stock Company v. ITO [81 ITR 162(Calcutta)] that an application for NOC cannot be said to be an application under section 195(2) of the Act. While deciding the scope of section 195(2) it is important to note that the tax which is required to be deducted at source is deductible only out of the chargeable sum. This is the underlying principle of section 195. Hence, apart from section 9(1), sections 4,5,9,90, 91 as well as the provisions of DTAA are also relevant, while applying tax deduction at source provisions. Reference to ITO(TDS) under section 195(2) or 195(3) either by the non-resident or by the resident payer is to avoid any future hassles for both resident as well as nonresident. In our view, sections 195(2) and 195(3) are safeguards. The said provisions are of practical importance. This reasoning of ours is based on the decision of this Court in "Transmission Corporation" (....