TaxTMI 
TaxTMI 
2018 (10) TMI 582
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....in the business of export of fabrics and general merchants. He filed return of income on 14/9/2010 showing income of Rs. 22, 37, 410/-. During assessment proceedings, it was noted that assessee has debited expenditure of Rs. 44, 140, 860/- as foreign agent commission in the profit and loss account under the head commission expenditure. The assessee was asked to show that why it is not be disallowed as tax has not been deducted thereon. Assessee submitted that the services have been provided by non-resident agents outside India and therefore no part of such income accrues to them in India by virtue of section 9 of the income tax act. Therefore, it was submitted that it is not taxable in India as per the provisions of section 195 and no tax is required to be deducted. The learned assessing officer did not accept the explanation of the assessee as there was no written agreement with the foreign agents and further no certificate under section 197 of the act has been obtained by assessee for non-deduction of tax at source. Therefore, in absence of clear identity of commission agents the learned AO disallowed the same. To support his contention the learned assessing officer discussed the....
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....the assessing officer has correctly disallowed the above sum. He further submitted that by withdrawal of the various circulars issued by the CBDT the position has changed and tax should have been deducted. 5. Despite notice, none appeared on behalf of assessee and therefore the issue is decided based on information available on record. 6. We have carefully considered the contentions raised by the learned departmental representative as well as the reasons given by the learned assessing officer in his assessment order. We have also gone through the reasons given by the learned CIT - A in his order while deleting the above addition. The learned Commissioner appeals has dealt with the whole issue vide para number 3 onwards of his order as under:- "3. Briefly stated facts of the case are that the appellant filed his Return of income for the relevant assessment year 2010-11 on 14.09.2010 declaring an income of Rs. 22,37,410-. The case was selected for scrutiny through CASS and notice u/s 143 (2) was issued and served upon the appellant within the stipulated period. During the course of assessment, the Assessing Officer(herein after The A.O.) noted that the appellant has in....
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....ade u/s 40(a)(i). 4.1 Before me, the Ld AR submitted that the appellant is an individual and is engaged, inter alia, in the business of export of General Merchandise & Fabric to Afghanistan. During the year under appeal, the appellant incurred an expenditure of Rs. 4,41,40,860/- by way of commission to the foreign agents who were from Afghanistan namely Mr. Atequallah & Mr. Amanullah of Kabul (Afghanistan) to whom the commission of Rs. 2,46,61,750 & Rs. 1,94,79,110 respectively were paid. The details of party-wise & invoice-wise orders procured through Mr. Atequllah along with copy of agreement & confirmation of commission paid and copy of his passport are enclosed A-2 to A-5. Further, details of party-wise & invoice-wise orders procured through Mr. Amanullah along with copy of agreement & confirmation of commission paid and copy of his passport are enclosed A-6 to A-9. As regards legal position for allowance of commission paid to foreign agents, we wish to state that the various provisions of Income Tax Act which are applicable & have so been discussed by the Ld. A.O in the order are Section-195,4, 5 & 9 of Income Tax Act, 1961.The Section -195 of the Act has to ....
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....non-resident includes all income from whatever source derived which- (a) is received or is deemed to be received in India in such year by or on behalf of such person; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year. Explanation 1.-Income accruing or arising outside India shall not be deemed to be received in India within the meaning of this section by reason only of the fact that it is taken into account in a balance sheet prepared in India. The plain language of section 5 provides that in the case of a non-resident assessee, the total income takes within its ambit two types of incomes: one, the income which is received or is deemed to be received in India, and second, the income which accrues or arises or is deemed to accrue or arise to him in India. In the present case, we are concerned with the later limb of this scope. Section 9 of the Act provides for the income deemed to accrue or arise in India. This is a fiction created by the enactment which is essential in fixation of the charge under the Act. The relevant extracts of section 9 are reproduced herein for the sake of ready reference:- ....
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....ulars issued by the Central Board of Direct Taxes (CBDT). The relevant extracts of one such circular is as under: Circular No.23, dated 23 July, 1969: "Foreign Agents of Indian Exporters: - A foreign agent of Indian exporter operates in his own country and no part of his income arises in India. His commission is usually remitted directly to him and is, therefore, not received by him or on his behalf in India .Such an agent is not liable to income-tax in India on the commission." * The above mentioned Circular No.23 mentions that the foreign agents of Indian exporters are not liable to income-tax in India on the commission. This circular was relied upon by the Hon'ble Supreme Court of India in the case of CITv. Toshoku Ltd.[ 1980] 125 ITR 525 wherein the Apex Court held as under:- "...if no operations of business are carried out in the taxable authorities, 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. The commission amounts which were earned by the nonresident assessee for services rendered outside India cannot, therefore, be deemed to be inc....
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.... For the removal of doubts, it is hereby clarified that the obligation to comply with sub-section(l) and to make deduction there under applies and shall be deemed to have always applied & extends and shall be deemed to have always extended to all persons resident or non-resident, person has- (I) a residence or place of business connection in India; or (ii) Any other presence in any manner whatsoever in India. To our mind, the Ld. A.O has made a grave error of law in interpreting the above explanation 2 added by Finance Act 2012. This explanation has only added a further fiction in respect of person making the payment to non-resident and not the person receiving the payment i.e. non-resident (Foreign Agent) who is receiving the payment. To clearly understand Sec.195, it can be divided into three limbs:- a) Firstly any person responsible for paying to nonresident not being company i.e the assessee in appeal. b) Secondly there has to be payment of any other some chargeable under the provisions of the Act. c) Thirdly the recipient of the payment has to be nonresident (i.e. Foreign Agent in our case). So there is no denial to the fac....
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....f non-resident recipient. That not being so, the provisions of sec 195 are not applicable and hence there was no obligation on the part of appellant to deduct TDS and thus the disallowance as made is not as per law and same needs to be deleted. The Ld. AR further submitted that the Ld.A.O mainly relied upon the Circular No.7/2009 dated 22/10/2009, wherein they have been withdrawn the earlier Circular No. 23 and 786 issued by the CBDT. The Ld. A.O has further relied upon the Advance Ruling in the case of SKF Boilers & Driers (P) Ltd. wherein it has been held that withholding of tax is mandatory u/s 195 of Income Tax Act, 1961 on export commission to Non-Resident agent, since commission is deemed to accrue and arise in India. The impact of withdrawal of earlier Circular No.23 dated 23/07/1969 and Circular No.786 dated 07/02/2000 came for adjudication before the ITAT DELHI BENCH "A" in the case of DY. Commissioner Of Income Tax Circle 1(1) ,New Delhi V/S Angelique International Ltd. Wherein it has been clearly upheld that the withdrawal of Circular No.23 & 786 wide Circular No. 7 of 22/10/2009 does not have any impact on non deduction of TDS to foreign agents. Simila....
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....ere the activity is carried out as a place of accrual of income. This effectively means that if a business is only partly carried out in India, only that part of the income attributable to the business activity carried out in India would be taxable in India. This position is further reiterated by explanation 3 to section 9(1 )(i) of the Act. That being the case, if no part of the business activity is carried out in India, as in the case of a foreign commission agent, then no part of the income can be taxed in India. Further, the Supreme Court, in the case of CIT v Toshoku Ltd 125 ITR 525, considered a situation where an Indian exporter had appointed a non resident sales agent for exports. The commission was credited in the books of the Indian exporter, and was subsequently paid. While holding that such credit did not constitute receipt of the commission in India, the Supreme Court also considered whether the commission accrued or arose in India. The Supreme Court observed 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 accru....
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....aken in the case of Avon Organics in favour of the assessee has been taken by the Hyderabad tribunal in the case of Priyadarshini Spinning Millls (P) Ltd. , 25 taxmann. com 574. The tribunal in this case took a view that no tax was deductible at source u/s. 195 on payment of such commission and that expenditure on commission could not be disallowed u/s. 40(a)(i) of the Act. In view of the discussion here, it is appropriate to hold that the said Circular No. 7 of 2009 is without the authority of the law and shall have no application in determining the taxability of income by way of commission in the hands of a foreign commission agent rendering services outside India. & also the Advance Ruling in the case of SKF Boilers & Driers Pvt. Ltd. is not warranted by the law as discussed above & no TDS needs to be deducted as commission paid to foreign agents. Accordingly it is prayed that Ld. A.O be ordered to delete the addition of Rs. 4,41,40,860 made on account of non deduction of TDS. 5. I have carefully considered the submissions made by the Ld AR and have gone through the assessment order. 5.1 In this appeal, the appellant has effectively contested the disal....
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.... accrued or arisen in India. Merely because the orders were procured by the appellant through these commission agents does not prove that the income by way of commission has been accrued or arisen to these non-resident commission agents in India. Further, confirmation from the commission agents regarding receipt of commission outside India from the appellant was filed before the Assessing Officer, but the Assessing Officer has not rebutted with cogent material evidence about the genuineness of the commission paid to these agents. It is further observed that the Assessing Officer has not brought any material on record to show that the non resident commission agents have rendered any services in India for earning the commission income from the appellant. 5.2 Section 195 of the Income tax Act requiring to deduct tax on foreign payments i.e. sum paid by Resident to Non Resident, comes in to force only when the payment made to the Non resident is his income chargeable under Indian Income tax Law. Therefore, TDS liability on such commission is an offshoot from its chargeability to Income tax under Section 5(2) of the Act. 5.3 Section 195 of the Income-Tax Act, 1961 read....
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....: a. Van Oord ACZ India (P) Ltd. vs. CIT : [(2010) 323 ITR 130 (Del)] b. CIT vs. Estel Communications (P) Ltd. : [(2009) 318 ITR 185 (Del)] c. CIT vs. ICL Shipping Ltd. : [(2009) 315 ITR 195 (Mad)] d. Jindal Thermal Power Co. Ltd. vs. DCIT: [(2010) 321 ITR 31 (Kar)]. e. CIT vs. Manager, State Bank of India : [(2010) 323 ITR 93 (Raj)] f. ITO (International Taxation) vs. Prasad Production Ltd.: [(2010) 129 TTJ 641 (SB)(Chennai)] g. Mahindra & Mahindra Ltd. vs. DCIT: [(2009) 313 ITR (AT) 263 (SB)(Mum)] 22 DTR (TRIB) 361] 122 TTJ (Mumbai)(SB) 577 :applied. It is, therefore, imperative to first analyze whether the commission paid by the appellant to the commission agent is chargeable to tax in India. Only if the answer to the said question is in the affirmative, then the provisions relating to withholding tax under section 195 of the Act shall be applicable. As per section 5(2) of the Act, a non-resident is liable to be taxed in India in respect of, (a) income which is received or is deemed to be received in India in such year by or on behalf of such person; or (b) income which accrues or ....
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....le territories which contributes directly or indirectly to the earning of those profits or gains. It predicates an element of continuity between the business of the non-resident and the activity in the taxable territories'". It is noted that in the case of the appellant, there is no dispute that the non resident commission agents have rendered services outside India for promotion of sales of Fabric or general merchandise exported by the appellant. The commission retained by the non-resident agent, therefore, did not arise on account of any 'Business connection' of the commission agent in India and cannot, therefore, be deemed to accrue or arise in India under section 9(1 )(i) of the Act. Reliance in this regard is placed the decision of the Hon'ble Supreme Court in the case of CIT v. Toshuku Ltd: 125 ITR 525, wherein the apex Court held that the commission amounts which were earned by the non-residents for services rendered outside India could not be deemed to be income, which had accrued or arisen in India in terms of section 9(1 )(i) of the Act. The relevant observations of the apex Court are as under: "In the cases before us, there were no terms corresponding t....
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.... 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 and Co. [1965] 56 ITR 20 (SC) and Carborandum Co. v. CIT [1977] 108 ITR 335 (SC) which are decided on the basis of s. 42 of the Indian I.T. Act, 1922, which corresponds to s. 9(1 )(i) of the Act). 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. The commission amounts which were earned by the non-resident assessees for services rendered outside India cannot, therefore, be deemed to be incomes which have either accrued or arisen in India. The High Court was, therefore, right in answering the question against the department. For the foregoing reasons, the appeals fail and....
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....e under section 40(a)(i) - Held, yes" iii. ITO v. M/s. Faizan Shoes Pvt. Ltd in ITA No. 2095/MDS/2012 dated 23,04.2013 " 6. "On going through the order of the Commissioner of Income Tax (Appeals), we find that the non-residents are only procuring orders for the assessee and following up payments, no other services are rendered other than procuring the orders and collecting the amounts. The nonresidents are not providing any technical services to the assessee. The commission payment made to non-residents also does not fall under the category of royalty or fee of technical services, therefore the Explanation to sub-section (2) of section 9 has no application to the facts of the assessee's case. We see that this case is squarely covered by the decision of the Supreme Court in the case of GE India Technology Cen. P. Ltd. Vs. CIT (327 ITR 456) wherein the Hon'ble Supreme Court held that the assessee is not liable to deduct TDS when nonresidents provided service outside India . It was held that when the services are provided outside India, the commission payments made to nonresidents cannot be treated as income deemed to accrue or arise in India, therefore, the provisio....
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....rmation of the foreign commission agents. No adverse material has been brought on record by the AO to prove that the confirmation given by the commission agents are factually incorrect. 5.4 The A.O. has relied upon the decision of Delhi Bench of Tribunal in the case of Asia Satellite Telecommunications Company Ltd. vs. DCIT [(2003) 85 ITD 478 (Delhi)] and has held that since the payment to non resident agents have been made for commission which is originating in India due to the Indian goods, so the commission income is attributable to the operations carried in India. In his regard, it is observed that the facts and the ratio of the above mentioned decisions are totally different from those of the appellant and thus no assistance whatsoever can be derived by the AO. Moreover, this order of the Hon'ble ITAT has been reversed by the Hon'ble Delhi High Court in the case of Asia Satellite telecommunications Co. Ltd. Vs. Director of Income Tax (2011) 322 ITR 140 (Del) wherein the Hon'ble High Court of Delhi has held that In order for income to be taxable u/s 9(1) (i), the carrying on of operations in India is a sine qua non. As discussed earlier, in the present case, the commis....
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....gents have their offices or business establishments in India for rendering such services to the assessee. The commissions to such agents have been paid not in India but overseas. Since no part of the services was rendered by such agents in India, no income arose on the payment of commissions to such agents and, consequently, as rightly argued by the learned AR, the question of deduction of tax at source u/s 195 of the Act doesn't arise." Para 7.5: "The CBDT vide Circular No. 7 of 2009 dtd. 22.10.2009 has withdrawn the Circular No. 23/1969 with retrospective effect. In the Circular No.23 of 1969, CBDT clarified that the payment made to nonresident commission agents was not liable to income-tax in India. Such clarification of CBDT was based on the provisions of sections 5, 7, 9, 195 and other relevant provisions of the Act. The question for consideration is when there is no relevant change in sections 5, 7, 9, 195 then as to how the withdrawal of Circular No.23 of 1969 of CBDT will make the commission paid to such non¬resident commission agents taxable in India. I am of the considered view that even after the withdrawal of Circular No.23 of 1969, the position will re....
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....ent made to nonresident commission agents was not liable to income-tax in India. Such clarification of CBDT was based on the provisions of section 5, 7, 9, 195 and other relevant provisions of the Act. The question for consideration is when there is no relevant change in sections 5, 7, 9, 195 then as to how the withdrawal of Circular No.23 of 1969 of CBDT will make the commission paid to such non-resident commission agents taxable in India. I am of considered view that even after the withdrawal of Qircular No.23 of 1969, the position will remain the same i.e. the commission paid to non¬resident agents is not liable to tax under the provisions of the I. T. Act when the services were rendered outside India, services were used outside India, payments were made outside India and there was no permanent establishment or business connection in India. It cannot be accepted that by virtue of CBDT Circular No.23/1969, the commission paid to non-resident agents become not liable to income-tax in India and on such withdrawal of Circular by the CBDT, such commission paid to non-resident agents become liable to income-tax in India. Irrespective of Circular issued by CBDT, the question of tax....
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.... "any business activity carried out through a person who, acting on behalf of the non-resident - (a) has and habitually exercises in India, an authority to conclude contracts on behalf of the non-resident, unless his activities are limited to the purchase of goods or merchandise for the nonresident; or (b) has no such authority, but habitually maintains in India a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the non-resident; or (c) habitually secures orders in India, mainly or wholly for the non-resident or for that non-resident and other non-residents controlling, controlled by, or subject to the same common control, as that nonresident: Provided that such business connection shall not include any business activity carried out through a broker, general commission agent or any other agent having an independent status, if such broker, general commission agent or any other agent having an independent status is acting in the ordinary course of his business" Thus, Section 9(1 )(i) provides that income arising out of 'business connection' is chargeable to tax in India only to the exte....
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.... the appellant from outside India .The relation between appellant and the agent are principal to principal. These agents do not have permanent establishment or permanent place of business place In India. The commission is remitted directly to these agents directly outside India and not received by them or on their behalf in India by any third party (or by them). Moreover, the AAR in the case of Ind Telesoft P. Ltd. 267 ITR 725 have held that tax was not required to be deducted out of foreign agents' commission. In that view of the matter, the decision of the AAR in SKF Boilers cannot, in my opinion, be said to be a binding precedent. In the case of CIT vs. EON TECHNOLOGY (P) LTD. [(2012) 343 ITR 366 (Delhi)], the Hon'ble Delhi High Court has 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 is made, it does not mean that the non-resident has received any payment in India- Appellate authorities, on the basis of material on record, have rightly held that business connection is not established-Tax was not deductibl....