TaxTMI 
TaxTMI 
2018 (6) TMI 1324
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....ommission. During the financial year 2008-2009, relevant to the assessment year 2009-2010, the appellant paid a sum of Rs. 3,74,09,773/- as commission to the said foreign agent. 3. According to the appellant assessee, since no amount of agency commission was chargeable to tax in India, the appellant assessee did not deduct tax at source (TDS) before payment of commission to the foreign agent. According to the appellant assessee, the foreign agent rendered service akin to the service of a broker to the appellant assessee, procuring orders upon market survey with regard to demand for the products of the appellant in the foreign country. 4. The Assessing Officer passed the assessment order disallowing the entire commission under Section 40(a)(i) of the Income Tax Act, 1961 (hereinafter referred to as the IT Act ) holding that from the agreement copies filed by the appellant assessee, it was very clear 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; (iii) systematic market research with regard to the needs of the products, etc. 5. Referring to the meaning of 'fee for tec....
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.... income accruing or arising through or from business connection in India, and the clarification issued vide Circular No.7 of 2009, dated 22.10.2009. 10. Sections 190 and 191 of the IT Act are set out hereunder: "Section 190. Deduction at source and advance payment.- (1) Notwithstanding that the regular assessment in respect of any income is to be made in a later assessment year, the tax on such income shall be payable by deduction or collection at source or by advance payment or by payment under sub-section (1A) off section 192, as the case may be, in accordance with the provisions of this Chapter. (2) Nothing in this section shall prejudice the charge of tax on such income under the provisions of sub-section (1) of section 4. Section 191. Direct payment.- In the case of income in respect of which provision is not made under this Chapter for deducting income-tax at the time of payment, and in any case where income-tax has not been deducted in accordance with the provisions of this Chapter, income-tax shall be payable by the assessee direct. Explanation. For the removal of doubts, it is hereby declared that if any person inclu....
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....lity under the domestic law. The above view would be fortified, if there were a Double Taxation Avoidance Agreement (DTAA). 14. The Commissioner of Income Tax (Appeals)-I, Coimbatore, held that if the commission agent did not have permanent establishment in India or if they did have one, but had no activity in India for earning such income, there would be no tax liability, as held by the Supreme Court in CIT v. Toshoku Ltd., reported in (1980) 125 ITR 525 (SC). 15. In Toshoku Ltd., supra, the Supreme Court held as under: "Section 9(1)(i) of the Act provides that 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 shall be deemed to accrue or arise in India. The Explanation to this clause 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 this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations c....
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.... .... As could be seen from the judgment, the Supreme Court did not rely on the Board's clarification as a concession, but as a clarification. It dealt with the issue on merits after referring to section 9 of Income-Tax Act, 1961 and held that, if any payments are for services rendered outside India, they cannot be deemed to be income which has either accrued or arisen in India in the light of the section. As the issue was decided on merits by the Apex Court not on the basis of the Board Circular, the withdrawal Circular of the Central Board of Direct Taxes would not in any way affect the legal position enunciated above, viz., that no part of remittance is liable to tax in India. Incidentally, the Board Circular No.26 dated 17th July, 1953 has not been withdrawn by Circular No.7 of 2009 dated 22nd October, 2009, hence cannot have implication for the present asst year 2009-10. A positive Circular No.786, dated 7th February, 2000 (2000) 241 ITR (st.) 132 in favor of non-deduction has, however, been withdrawn. Though this Circular had been issue with the concurrence of Comptroller and Audit General of India, it has been withdrawn without his concurrence. The fa....
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....cs Co. Ltd.'s case (supra) on this point in GE India Technology Centre P.Ltd. v. CIT [2010] 327 ITR 456 (SC), so that there is no scope for requiring clearance from the Assessing Officer in cases where there is no liability for the non-resident where the payment is not received by the non-resident in India, in following words: In cases of such patent instances of non-deduction, where there is no liability in India, the question of any disallowance under section 40(a)i) or 40(a)(ia) does not arise, because there can be no inference of failure to deduct tax at source, where no tax need be deducted under the law. ..." 17. As observed above, the Revenue appealed to the learned Tribunal contending that the Commissioner of Income Tax (Appeals)-I, Coimbatore, had wrongly deleted the addition made by the Assessing Officer under Section 40(a)(i) of the IT Act for not deducting TDS in respect of the payment made by the assessee to its overseas agent. 18. By the order under appeal, the learned Tribunal reversed the order of the Commissioner of Income-tax (Appeals) inter alia holding as hereinbelow: "10. ... In view of the different stands adopted by the parties, th....
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....Therefore, we find that assessee's agreement in question leading to payment in hand made to the overseas entity amounts to fees for 'technical' services. Hence, the assessee was liable to deduct TDS as per the provisions of the Act , failure of which would entail disallowance under section 40(a)(ia) of the Act . 12.We have also perused the case law submitted by the assessee. Admittedly, in the circular relied upon by the assessee as well as in the case law, the aforesaid explanation substituted by the Finance Act, 2010, was not subject matter of the dispute. Hence, it is not applicable qua facts of the case. 13.As sequel to our above discussion, the Revenue succeeds in the present appeal and the order of the Assessing Officer is restored." 19. From the judgment and order of the learned Tribunal under appeal, 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 no....
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....her rendering of the service of market survey abroad would tantamount to rendering of technical service so as to attract taxes in India? (iii) Whether an assessee is liable to deduct TDS on commission paid to overseas agents operating abroad? (iv) Whether the amendment of the Income Tax Act with retrospective effect from 1.6.1976 by the Finance Act, 2010 clarifying that income of non-resident would be deemed to accrue or arise in India under Clause (v) or clause (vi) or clause (vii) of sub-section(1) and be included in the total income of the non-resident whether or not the non-resident has a residence or place of business or business connection in India, and whether or not the non-resident has rendered services in India is attracted in the facts and circumstances of this case? 23. The first question necessarily and obviously has to be answered in favour of the appellant/assessee and against the Revenue, the question 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 ....
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....st, by way of royalty and by way of fees for technical services and not to brokerage or job wise commission on activities incidental to procurement of orders. 27. The Assessing Officer, in effect, held that income could be deemed to accrue or arise in India under Section 9(1)(vii) of the IT Act even if the non-resident did not have place of business or business connection in India or had not rendered services in India. The exceptions provided under Section 9(1)(vi)(b) / 9(1)(vii)(b) of the IT Act, which apply to utilization of services of business outside India, did not cover the assessee's case. 28. The Assessing Officer had also taken note of withdrawal of two circulars: (i) Circular No.786, dated 7.2.2000, dealing with payment of export commission, opining that withdrawal, being procedural in nature, would apply to proceedings pending; and (ii) Circular No.23 of 1969, which exhaustively dealt with subject of Non-residents Income accruing or 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 s....
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....teration of the expression sum chargeable under the provisions of the Act from Section 195(1)." 32. Where there is no liability in India, there can be no question of disallowance under Section 40(a)(i) or Section 40(a)(ia) of the IT Act on the ground of non-deduction of tax at source. Moreover, where a non-resident has no permanent establishment in India, there can be no liability either under the domestic law or under Double Taxation Avoidance Agreement. In any case, even if a non-resident Indian did have a permanent establishment, but income was earned without availing of such permanent establishment, the income for services rendered abroad could not have been liable for tax deduction at source. 33. Under Section 9(1)(vii)(b), income by way of fees for technical services payable by a person, who is a resident, is taxable income except where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India or for the 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 rende....