TaxTMI 
TaxTMI 
2018 (4) TMI 1564
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....essee to nonresidents." 2. The facts are that the assessee, who is engaged in trading, manufacturing and export of shoes, had filed its return of income for the year under consideration at income of Rs. 1,64,73,630/-. During the assessment proceedings, the AO had made an addition of Rs. 70,54,210/- in respect of commission paid by the assessee to foreign agents. While making the said additions, the AO was of the view that the CBDT has issued Circular No.7 dated 22.10.2009, by which, earlier Circulars No.23 dated 23 July 1969, Circular No.163 dated 29th May 1975 and Circular No. 786 dated 7th February 2000, which were based on Circular No.23, have been withdrawn. According to the AO Circular No.23 was issued in the context of Section 9 of the Income Tax Act, which deems certain income to accrue or arise in India for non-residents. Thus, according to the AO, in view of this, assessee should have deducted tax at source. The AO further held that post withdrawal of Circular No.786, the income arising to foreign agents on account of export commission falls u/s 5(2) (b) of the Income-tax Act, as the income had accrued in India when the right to receive the income became vested. The AO ....
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.... As observed from AO's action , it may be mentioned here that the AO has subjected the payment of commission to TDS provisions only after the cut off date of 22.09.2009, the date on which the Circular no. 7 of 2009 got operational, meaning thereby he has disallowed payments of commission for the period 22.09.2009 to 32.03.2010, and for the period prior to it he has allowed the appellant's claim in respect of payments made before the said date and has thus accepted appellant's claim of such payments considering the same to be complying to the section 5(2) or section 9 of the Act. Therefore, while considering so, I find that the issue as emerging and. requiring adjudication therefore is whether the appellant is liable to deduct tax at source (TDS) on the payments made to non resident agent(s) in a situation which is subsequent to the withdrawal of the said circular and whether the disallowance made in respect of the payment made to foreign commission agents amounting to Rs. 70,54,210/- u/s 40(a)(i) in view of provisions of section 195 of the Act is called for or not. Further, two important aspects that need further elucidation in the appellant's case i.e. whether there exists any bus....
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....ctober, 2009 withdrawn its earlier Circulars Nos. 23 dated 23-7-2009, 163 dated 29th May, 1975 and 786 dated 7-2-2000. The earlier circulars issued by the CBDT have clearly demonstrated the illustrations to explain that such commission payments can be paid without deduction of tax. Thus, the main thrust in such a situation is whether the commission made to overseas agents, who are nonresident entities, and who render services only at such particular place, is assessable to tax. Section 195 of the Act very clearly speaks that unless the income is liable to be taxed in India, there is no obligation to deduct tax. Now, in order to determine whether the income could be deemed to be accrued or arisen in India, section 9 of the Act is the basis. This section, in our opinion, does not provide scope for taxing such payment because the basic criteria provided in the section is about genesis or accruing or arising in India, by virtue of connection with the property in India, control and management vested in India, which are not satisfied in the present cases. Under these circumstances, withdrawal of earlier circulars issued by the CBDT has no assistance to the department, in any way, in disa....
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....n the basis of the same it is further observed that in the period post withdrawal of the CBDT Circular, the provisions of section 5(2) and section 9 has not undergone any change. 14. However, before proceeding further, it may be worthwhile to refer to the provisions of sec 9 (1) (i) of the Act, and to see that commission payments could be subject to tax by the AO or not. The AO in order to bring said commission payments within the ambit of TDS provisions has invoked Section 9(1 )(i) of the Act. The relevant extract of section 9(1)(i) is reproduced as under: "9. (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 1], For the purposes of this clause - 1. 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 suc....
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....ther that where such broker, general commission agent or any other agent works mainly or wholly on behalf of a non-resident (hereafter in this proviso referred to as the principal non-resident) or on behalf of such non-resident and other non-residents which are controlled by the principal non-resident or have a controlling interest in the principal non-resident or are subject to the same common control as the principal non-resident, he shall not be deemed to be a broker, general commission agent or an agent of ah independent status". 15. As regards the import of section 9 (1)(i) of the Act in terms of business connection, the Hon'ble Delhi High Court in the case of CIT v. EON Technology (P) Ltd, reported at 343 ITR 366 while dealing with payment of commission by the said assessee company to its parent company i.e. ETUK of UK which was located outside India has held that the commission payment to its British parent/holding company ETUK could not said to have been accrued to ETUK in India and therefore, the assessee was not liable to deduct tax at source from payment of commission to ETUK. The head note of order is reproduced hereunder: "Section 9 of the Income-tax ....
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.... in respect of such agents in India. 17. The judicial decisions that have evolved has further clarified the issue in its correct perspective, notable mention out of which may be made of the decision of the Hon'ble Apex Court as rendered in the case of C.l.T. vs. Toshoku Limited, reported at 125 ITR 525 (SC), wherein the Hon'ble Apex Court while dealing with the twin aspects of the situation in the case of the assessee before it, as to what was the effect of the entries in the books of accounts of the Indian assessee which had resulted in debit and credit entries on account of commission and secondly, whether procurement of export orders by the foreign companies for the Indian company had resulted in a business connection, has opined as under: "It cannot be said that the making of the book entries in the books of the statutory agent amounted to receipt by the assessees who were non-residents as the amounts so credited in their favour were not at their disposal or control: It is not possible to hold that the non-resident assessees in this case either received or can be deemed to have received the sums in question when their accounts with the statutory agent were cre....
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....contention overlooks the effect of cl. (a) of the Explanation to cl. (i) of sub-s. (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 carried out in India, the entire income accruing there from 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 (See CIT v. R. D. Aggarwal & Co. [19651 56 ITR 20 (SC) and Carborandum Co. v. CIT [19771 108 ITR 335 (SC) which are decided on t....
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....to its agents resident in such countries with which it has entered into DTAAs, the assessee was under no obligation to deduct tax at source on such payments of commission when the foreign commission agents provide services from outside India. It may be relevant here to refer to a decision of the Hon'ble Supreme Court of India as rendered in the case of GE India Technology Center (P.) Ltd. v. CIT (2010) 327 ITR 456 (SC), wherein it has held as under - Where the income is not chargeable to tax, there is no question of deducting tax at source. In the instant case, the commission paid by the assessee (appellant) to his agent is not chargeable to tax in India. Therefore, the assessee was not liable to deduct tax at source on the said payments. Since, the income of foreign agents is outside the purview of section 9, consequently section 195 of the Act will not come into play. In view of the foregoing it is thus evident that it is not the case of the AO that the foreign agent as such is carrying on any business activity in India. Rather, on the contrary, it is the appellant who has engaged the services of the non-resident agent outside India on pure commercial and busine....
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....nt of such agents in India. Therefore, in my view, the withdrawal of the circular will not make any difference as to bringing the commission payments withig the ambit of tax. Rather, per the force of judicial decisions and relying upon the same, notably as rendered by the Hon'ble Apex Court in Toshoku Limited (supra) and the Hon'ble Madras High Court's decision in the case of Faizan Shoes and Hon'ble ITAT Hyderabad's decision in the case of Divi's Laboratories Ltd (supra), wherein it is duly shown that without the existence of business connection or permanent establishment, and/or with the withdrawal of circular, the provision of section 9(1)(i) or section 5(2) have not undergone any change, as a result of which the commission income of these agents does not get taxable in India. Therefore, due to the non-existence of any permanent establishment or any business connection which is indeed a pre-requisite for holding that the income does accrue or arise in India, and on that basis without correctly invoking the provisions of section 5(2) or 9(1)(i) of the Act, the appellant cannot be asked to deduct tax at source either under the Income-tax Act or the treaty provisions as per the exi....
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....ts have procured export orders for the assessee firm and assisted in the timely realization of the payments; that the commission is declared in the GR issued by the assessee for the purpose of export of goods; that the same is within the limits prescribed by Reserve Bank of India and all remittances have been made through proper banking channels; that the non-resident agent has carried out all his activities outside India, did not render any service in India and did not have Permanent Establishment (PE) in India; that residing in the foreign countries with whom India has entered into a DTAA and under the Article 7 of the said DTAA, the income received is being taxed in their hands in their country; that the assessee has remitted payments to them outside India through proper banking channels; that these agents have carried out business activity of procurement of export orders and timely realization of payments for the assessee outside India; that as the income received by these agents is business income, the same cannot be taxed under the Income-tax Act 1961 in the absence of business connection and permanent establishment in India; that these non resident commission agents offer to....
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....dent, no income shall be deemed to accrue or arise in India to him through or from operations which are confined to the purchase of goods in India for the purpose of export; (c) in the case of a non-resident, being a person engaged in the business of running a news agency or of publishing newspapers, magazines or journals, no income shall be deemed to accrue or arise in India to him through or from activities which are confined to the collection of news and views in India for transmission out of India, (d) in the case of a non-resident, being- (1) an individual who is not a citizen of India; or (2) a firm which does not have any partner who is a citizen of India or who is resident in India; or (3) a company which does not have any shareholder who is a citizen of India or who is resident in India, no income shall be deemed to accrue or arise in India to such individual, firm or company through or from operations which are confined to the shooting of any cinematograph film in India, Explanation 2. - For the removal of doubts, it is hereby declared that "business connection" shall include any business activity carried out through a....
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....mounts realized on export contracts procured by ETUK for assessee - Assessing Officer held that commission income earned by ETUK had accrued in India or was deemed to accrue in India and, therefore, assessee was liable to deduct tax at source there from and as there was failure, said expenditure should be disallowed under section 40(a)(ia) - Whether when ETUK was not rendering any service or performing any activity in India itself, commission income could be said to have accrued, arisen to or received by ETUK in India merely because it was recorded in books of assessee in India or was paid by assessee situated in India - Held, no - Whether for applying section 9 Assessing Officer was required to examine whether said commission income was accruing or arising directly or indirectly from any business connection in India - Held, yes - Whether since facts found by Assessing Officer did not make out a case of business connection as stipulated in section 9(1)(0, commission income could not be said to have accrued to ETUK in India and, therefore, assessee was not liable to deduct tax at source from payment of commission to ETUK - Held, yes [In favour of assessee]." ....
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....ithout deduction of tax; that thus, the main thrust, in such situation, is whether the commissioner paid to overseas agents, who are non-resident entities and who render services only at such particular place, is assessable to tax; that section 195 very clearly speaks that unless the income is liable to be taxed in India, there is no obligation to deduct tax; that in order to determine whether the income can be deemed to be accrued or arisen in India, section 9 is the basis; that this section does not provide scope for taxing such payment because the basic criteria provided in the section is about genesis or accruing or arising in India, by virtue of connection with the property in India, control and management vested in India, which were not satisfied in the instant cases; that under these circumstances, withdrawal of earlier circulars issued by the CBDT had no assistance to the department, in any way, in disallowing such expenditure; that it appeared that an overseas agent of Indian exporter operated in his own country and no part of his income arises in India and his commission is usually remitted directly to him by way of TT or posting of cheques/demand drafts in India and, the....
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....rted to Japan and France and sold through non-resident assessees who were paid commission, held as under: The second aspect of the same question is whether the commission amounts credited in the books of the statutory agent can be treated as incomes accrued, arisen, or deemed to have accrued or arisen in India to the non-resident assessees during the relevant year. This takes us to s. 9 of the Act. It is urged that the commission amounts should be treated as incomes deemed to have accrued or arisen in India as they, according to the department, had either accrued or arisen through and from the business connection in India that existed between the non-resident assessees and the statutory agent. This contention overlooks the effect of cl. (a) of the Explanation to cl. (i) of sub-s. (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 carried out in India, the entire income accruing the....
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....on with regard to the treat provisions as existing vide the DTAAs entered into by India with the countries i.e Italy, USA and UK wherein the commission agents reside. 25. The decision of the Authority for Advance Rulings in the case of SKF Boilers & Driers Pvt. Ltd. (Supra) has considered its earlier decision in the case of Rajiv Malhotra dated 03.07.2006 in AAR No. 671 of 2005 and the decision in the case of Spahi Projects Pvt. Ltd. (Supra) dated 29.07.2009 in AAR No. 802 of 2009 has not been considered and hence the reliance on the decision of AAR in the case of SKF Boilers & Driers Pvt. Ltd. by the learned Assessing Officer does not take into account the factual and legal matrix, in which the AAR has held that "in the instant case, the non-resident assessees did not carry on any business operations in the taxable territories. They acted as selling agents outside India. The receipt in India of the sale proceeds of tobacco remitted or caused to be remitted by the purchasers from abroad does not amount to an operation carried out by the assessees in India as contemplated by cl.(a) of the Explanation to s.9(1)(i) of the Act". 26. The AO completed assessments under ....
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.... for A.Y. 2011-12, a similar disallowance was made, which was deleted (APB 76-86) by the CIT(A) and the department did not file any appeal against the CIT(A)'s order. 31. Apropos, Circulars of CBDT, in "Kerala Finance Corporation vs. CIT (1994) 75 Taxman 573(SC), the Apex Court has stated that the circular issued by CBDT under section 119 of the Act cannot override or detract the provisions of the Act. Thus, the withdrawal of circular does not affect the settled position that export commission is not taxable in India as services are rendered outside India. 32. Moreover, post withdrawals of the circulars, in "ITO vs. Trident Exports" (2014) 44 Taxman.com 297 (Chennai-Trib), it has been held as under : 8. We have heard both the parties and carefully perused the materials available on record. From the facts of the case, it is evident that the assessee has made payments to commission agents located in foreign countries. These foreign agents have rendered services in their respective countries and had received the commission. It is also evident that the foreign agents did not have any PE in India and there was nothing brought on record to show that the agreeme....
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....case of Farida Shoes (P) Ltd. (supra) deleted the disallowance observing as under:- *********** 6. Similar issue has been considered by this Tribunal in the case of ITO vs. Faizan Shoes (P) Ltd. (2013) 34 taxman.com 79 (Chennai) wherein the co-ordinate bench of this Tribunal, to which one of us is a party, after considering the decision of the Hon'ble Supreme Court in the case of GE Technology Centre P. Ltd (supra) held that sales commission paid by the assessees to non residents are not chargeable to tax in India, therefore provisions of section 195 are not applicable. On going through the above order of the Commissioner of Income Tax (Appeals), we find that in all these cases assessees paid sales commission to its non resident agents for the services rendered by them outside India and the sales commission is not chargeable to tax in India so as to deduct TDS in such payments under section 195 of the Act. Therefore, respectfully, following the decision of the Hon'ble Supreme Court in the case of GE India Technology Centre (P) Ltd (supra) and the above cited decision of the coordinate bench of this Tribunal, we sustain the order of the Commissioner of Income Tax (....
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....) (x). Syntex Industries Ltd. Vs. ADIT (2013) 30 taxmann.com 290 (Ahmedabad-Trib.) 36. In the assessee's case, however, as seen hereinabove, the relevant provisions sought to be attracted by the AO is section 9(1)(i). That being the case, none of these cases, is applicable to the present one. 37. In "Palam Gas Service vs. CIT" 81 taxmann.com 43 (SC), overruling "CIT vs. Vector Shipping Services Pvt. Ltd.", 38 taxmann.com 77 (All), the Hon'ble Supreme Court has upheld the disallowance made u/s. 40(a)(ia) of the Act for TDS default on freight payment. It has been held that the plea of the assessee company that no disallowance can be made u/s. 40(a)(ia), as the word "payable" occurring in section 40(a)(ia) refers to only those cases, where the amount is yet to be paid and does not cover the cases where the amount is actually paid, is not acceptable as section 40(a)(ia) covers not only those cases wh3ere the amount is payable, but also when it is paid. The applicability of this decision to the facts of the present case, has not been made out. 38. In "Performing Right Society", 1976 AIR 1973 (SC), the issue related to payment of royalty, whic....
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....Act. Moreover, the Assessing Officer has himself accepted that payments made prior to withdrawal of the Circular do not call for any disallowance u/s 40(a)(i) of the Act. 41. In view of the above, the order of the ld. CIT(A) is found to be well reasoned. The department has not been able to dislodge the detailed well reasoned findings recorded therein. Therefore, the grievance sought to be raised by the department by way of grounds Nos. 1 & 2 is found to be shorn of merit and it is rejected as such. The finings of the ld. CIT(A) are confirmed." 9. Apropos the case laws relied on by the Department in the present case, they are dealt with as under: 1. 'ADIT vs. Ess Vee Intellectual Property', 7 SOT 38 (Mum- Tribunal). As per the facts of that case, the assessee therein was in the business of consultancy in respect of registration and enforcement of intellectual property rights. The services rendered by the assessee also included registration and enforcement of intellectual property rights abroad as well and for that purpose, the assessee had availed services of the entities based abroad. The assessee did not deduct any tax from the payments made to such f....
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....the assessee. 5. 'Performing Rights Society Ltd. vs. CIT', 1976 AIR 1973 (SC). As per the facts of that case, the non-resident commission agents were procuring export orders and assisted in the timely realization of the export proceeds. It was an accepted fact that they did not have any permanent establishment / business connection in India. The question that the agreements had been executed in India or outside India was held to be of no relevance. 10. The following decisions relate to Section 9(1)(vii) of the Act and so they are not applicable to the present case: 1. 'Metro & Metro vs. Add. CIT'. in ITA No. 393/Agra/2012 (ITAT-Agra). 2. 'ACIT vs. Evolve Clothing Co. (P) Ltd.' in ITA No.2100/Mds/2012 (Chennai-Trib). 3. 'Ashapura Minichem Ltd. vs. ADIT' in ITA No. 2508/Mum/08 (Mumbai-Trib.) 4. 'ONGC Videsh Ltd. vs. ITO', (2013) 141 ITD 556 (Delhi). 11. 'Shell India Markets (P) Ltd. vs. CIT', order dated 17.01.2012, passed by the Authority for Advance Ruling, New Delhi, in AAR No.833 of 2009 (Copy placed on record) relates to applicability of Section 9(1)(vi). Again, this decision too is not applicable in the facts of the present cas....