TaxTMI 
TaxTMI 
TaxTMI 
2018 (10) TMI 582
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....eral 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 provisions of the income tax and relied upo....
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....he 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 incurred expenditure of Rs. 4,41,40,860/- by way of commissio....
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.... 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 be read along with charging Section-4,5 & 9 of the Act. Section 195 of the Act deals with the deduction of ....
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.... 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:- "(1) The following incomes shall be deemed to accrue or arise in India:- (i) all incomes accruing or arising, whether directly or indirectly, through or from any bu....
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....nt 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 incomes which have either accrued or arisen in India..." Section 9(1 )(vii): Fees for technical services "Explanation 2 to section 9 contains an inclusive definition of business connection but it applies only to a business activity c....
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.... 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 fact that the appellant is the person as stated in limb "a" above and so as per Sec. 195(1) of I.T Act he is under obligation to deduct tax on payment made to non-resident provided the payment is chargeable to tax as laid in clause "b".This explanation is only trying to clarify the person who is obliged to ....
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....009, 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. Similar view has been taken by same Bench in the case of Allied Nippon Ltd. Vs. Dy. Commissioner of Income Tax, Circle-1 (1), New Delhi. The Ld. A.O has further referred to the recent decision of Authority for Advance Ruling in the case of SKF Boilers & Driers (P) Ltd. The main contention of AAR in holding the commission paid by SKF Boilers and Driers Pvt. Ltd.....
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....f 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 accrued or arisen in India to the non resident assessees during the relevant year. This takes us to section 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-resi....
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.... 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 disallowance of Rs. 4,41,40,860/- claimed as expenditure on account of export commission to non-resident u/s 40(a)(ia) of the Income Tax Act. It is noted that during the relevant assessment year, the appellant has exported fabric and general merchandise to M/s Mujib Sahal Baba Khel, Sarya Sargur, Kabul, Afghanisthan through the Commission Agents namely Mr Atiquallah and Mr.Amanullah. The appellant had entered ....
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.... 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 reads as follows " (1) Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest or any other sum chargeable under the provisions of this Act (not being income chargeable under the head "Salaries") shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mo....
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....ai)] 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 arises or is deemed to accrue or arise in India during such year. Section 5(2), the charging section for taxing non resident income provides for two conditions. First condition of receipt of income in India is ruled out in this case of the appellant, as the non resident agents have not received the commission in India, so it cannot be said that they have received any income in India .However the second condition viz., income accrues or arisen or deemed to accrue or arise requires further elaboration. F....
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....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 to the term extracted above which was found in the agreements between the assessee and the Japanese company in Raghava Reddi's case [1962] 44 ITR 720 (SC). 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 nonresidents 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 ac....
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.... 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 are hereby dismissed with costs". The Hon'ble Delhi High Court in CIT v. EON Technology (P) Ltd (supra), following the decision of the Apex Court in Toshuku (supra), held that export commission earned by the non-residents for services rendered outside India could not be deemed to be income which had either accrued or arisen in India in terms of section 9(1 )(i) of the IT Act. Further, in the case of Spahi Projects P. Limited.,315 ITR 374 (AARj, the Authority for Advance Rulings ('AAR'), after considering the provisions of section 9(1 )(i) ....
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....l 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 provisions of section 195 has no application. In order to invoke the provisions of section 195 of the Act, the income should be chargeable to tax in India. Here the commission payments to non-residents are not chargeable to tax in India and therefore the provisions of section 195 are not applicable. In the circumstances, we sustain the order of the Commissioner of Income Tax (Appeals) in deleting the disallowance made under 40(a)(i) of the Act." iv. ACIT vs. T. Abdul Wahid & co (2014) 46Taxmann.com,(Chennai ) wherein it was held that "Agency/sales commission payment to Non resident agents for....
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....e 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 commission agents have no business connection in India, therefore, their income from commission cannot be deemed to be income accruing or arising in India for the purposes of section 9(1 )(i) of the Act. 5.5 The Assessing Officer has also relied upon the decision of Hon'ble ITAT, Delhi, in the case of Lufthansa Cargo India Pvt Ltd. vs DCIT (2005) 274 ITR 20 in support of her contention. However, it is noted that the aforesaid ratio of decision has been based on the different facts and circumstances from the case of the appellant. The aforesaid decision as rendered in respect of section 9(1 )(vii)(B) read with section 201(1 A) of the Income Tax Act.....
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....ission 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 remain the same i.e., the commission paid to non-resident agents is not liable to tax under the provisions of 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 taxability of such commission....
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....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 taxability of such commission to income-tax has to be decided as per the provisions of section 9(1) of the Act. I am of considered view that the provisions of sec. 9(1) are not applicable to the commission paid to such nonresident agents. Such income (commission) in the hands of nonresident commission agents did not accrue or arise directly or indirectly, through or from any business connection in India. Such income to the non- resident commission agents did not accrue or arise in India through or from any property in India or through the transfer of capital asset situated in India, In the facts and circumstances the provisions of sec. 9(1) were not applicable to such payment of commi....
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....esident: 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 extent of income reasonably attributable to the operations carried out in India. It may be noted that for invoking Section 9(1 )(i), existence of business connection (Permanent Establishment) is a sine qua non and inevitable. It also appears that in the aforesaid ruling, the earlier ruling of the AAR in the case of Spahi Projects (supra) has not been considered and therefore it cannot be said to be per incuriam. Further, in this case, the decision of the Hon'ble apex Court in the case of Toshuku (supra) has also been not considered. Therefore, the finding of the AO that right to receive commission arises in India when the order is executed by the person resident in India is, in my view, not correct since the mere fact that pay....
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....e 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 deductible at source and disallowance under s. 40(a)(i) was not called for." The judgment of Hon'ble Delhi High Court is subsequent to the judgment in the case of Rajiv.Malhotra (AAR). Further the judgement of jurisdictional High Court has binding force. 5.8 On the basis of above mentioned facts and circumstances of the case, I am of the considered opinion that Commission payments to non-resident commission agents for export by the appellant does not represent income which is chargeable to tax under section 195 of the I.T act 1961 when analyzed under the framework of provisions of the Indian I.T Act. Hence, in my view, tax deduction at source was not required for said commission payments to non-resident agents and hence this expenses cou....