TaxTMI 
TaxTMI 
2017 (9) TMI 1794
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.... as laid down as per section 9(1)(i) which clearly comes in the nature of payment by the assessee to non-residents." 2. The brief facts of the case are that the assessee who is in the trade, manufacturing and exports of shoes filed its return of income for the year under consideration at income of Rs. 2,31,93,300/-; that during the assessment stage, the AO while going through the assessee's claim of commission of Rs. 63,08,727/- as paid by the assessee to its foreign agents found that the assessee did not deduct the tax at source (TDS) on such payments; that the AO took a view that such payments in terms of sections 5(2) and 9(1)(i) of the Act were deemed to be accruing or arising in India, therefore the assessee was bound to deduct the tax at source (TDS) on such payments; that, therefore, while considering that the assessee did not deduct tax at source on such payments, the AO, disallowed the said payments u/s 40(a)(i) of the Act and accordingly addition of the amount of Rs. 63,08,727/- was made towards the assessee's income; that while making the said addition, the AO took a view that CBDT has issued Circular No.7 dated 22.10.2009 by which earlier circular No.23 dated....
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....e Act have more or less a synonymous sense and income is set to accrue or arise when the right to receive it comes in existence. No doubt the agents render services abroad and have solicited orders, but the right to receive commission arises in India when the order is executed by the commission agent in India. The fact that the agents have rendered services abroad in the form of soliciting the orders and the commission is remitted to them abroad in lieu of services rendered for execution of business orders in India. Similar view has been taken by the Authority for Advance Ruling in the case of S.K.F. Boilers and Driers Pvt. Limited. In this case it has been held that withholding of tax is mandatory u/s 195 of the I. T. Act on export commission paid to a non-resident agent, since commission is deemed to accrue or arise in India. In view of the legal position mentioned above the reply of the assessee has no force, therefore, same is rejected. The case laws mentioned by the assessee in its reply are not applicable, as the position is entirely changed w.e.f 22.10.2009 i.e. after withdrawal of Circular No. 786 and other relevant circulars issued by the CBDT. A....
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....6.2016, against which, no appeal was preferred by the department. The ld. Counsel for the assessee relied on certain case laws, which shall be dealt with presently. 7. We have heard the parties and have perused the material on record. 8. In the impugned order, the ld. CIT(A) has observed as follows : '10. Thus from a perusal of the facts of this appeal, submissions as made coupled with the judicial pronouncements that has been relied upon by the Ld AR, it is thus the appellant's contention that the withdrawal of the circular should not per se change or alter the provisions of relevant sections as these exist on the statute. Once the provisions of section 5(2) and section 9(l)(i) are considered in the light of the fact that these agents do not have any business connection or permanent establishment in India, therefore there could be no occasion to question the assessee's action in not deducting the tax at source as the provision of section 195 were not attracted. 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 Ci....
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....ssee was under obligation to withhold tax under section 195 of the Act. 11. As regards the issue of the withdrawal of the circulars which is at question in the present appeal, it is relevant to refer here to a decision of the Hon'ble ITAT, Hyderabad Bench in the case of DCIT v. Divi's Laboratories Ltd. 131 ITD 271 (Hyd.), wherein the Hon'ble ITAT Hyderabad while considering the impact of said Circular No. 7 of 2009, has held as under- 8. We have considered the submissions of both the parties and perused the relevant material available on record. The moot question that arises out of these appeals is whether the payment of commission made to the overseas agents without deduction of tax is attracted disallowance under section 40a(ia) of the Act or not. Whether the payment in dispute made by way of cheque or demand draft by posting the same in India would amount to payment in India and consequently whether mere payment would be said to arise or accrue in India or not?. First we will take up the issue whether the payment of commission to overseas agents with out deduction of tax is attracted disallowance under section 40(a)(ia) of the Act or not. We find th....
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....ns relating to deduction of tax applies only to those sums which are chargeable to tax under the Income-tax Act. If the contentions of the department, are to be taken as correct, that any person making payment to a non-resident is necessarily required to deduct tax, then the consequence would be that the department would be entitled to appropriate the monies deposited by the payer even if the sum paid is not chargeable to tax because there is no provision in the Income-tax Act by which a payer can obtain refund. As per section 237 read with section 199 of the Act implies that only the recipient of the sum i.e., payee would seek a refund. In view of the above, hence, no tax is deductible under section 195 of the Act on commission payments and consequently the expenditure on export commission payable to non-resident for services rendered outside India becomes allowable expenditure and the same is outside rigors of the section 40(a)(ia) of the Act. 11.2 While going through the afore cited decision in the case of Divi's Laboratories Ltd. (supra), wherein the Hon'ble ITAT Hyderabad has duly interpreted the import and impact of the withdrawal of the circular, it is there....
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....nbsp; ** [(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, fir....
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....ent of commission to ETUK. The head note of order is reproduced hereunder: "Section 9 of the Income-tax Act, 1961 - Income - Deemed to accrue or arise in India Assessment year 2007-08 - Assessee-company was engaged in business of development and export of software - During relevant assessment year, it had paid commission to its British parent/holding company ETUK on sales and amounts 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 7 ITA. 909/Mds/13 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 fr....
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.... 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 credited, since a credit balance, without more, only represents a debt and a mere book entry in the debtor's own books does not constitute payment which will secure discharge from the debt. They cannot, therefore, be charged to tax on the basis of receipt of income actual or constructive in the taxable territories during the relevant accounting period. 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(l)(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 In....
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....ad through or from any business connection in India cannot be deemed to accrue or arise in India (See CIT v. R. D. Aggarwal & 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 IT. Act, 1922, which corresponds to s. 9(l)(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(l)(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. 11. The facts of the present case are akin to the facts of the decision in Toshoku Limited case, referred supra. In the instant case also the assessee engaged the....
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....the appellant's own case for AY 2012-13 in the appellant's own case has accepted assessee's claim of commission payments made to foreign agents. As mentioned earlier though, the Ld. AR of the appellant while making its submissions against the impugned addition, has also referred to the existing DTAAs as entered into by India with Italy, USA and UK, and on the basis of which it is asserted that in case of non-resident commission agent residing in foreign countries with whom India has entered into DTAAs, the assessee was under no obligation to deduct tax at source when the non-resident commission agent provides services outside India on payment of commission. In this regard, the Hon'ble Supreme Court of India in the case of GE India Technology Center (P.) Ltd. v. CIT [2010] 327 ITR 456 (SC) 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....
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....efore in view of the above, I find that the appellant is correct in its approach in not deducting tax at source on the payment of commission made to foreign commission agents. While finding that the appellant was not liable to deduct tax at source on the payments of commission made to foreign commission agents u/s 195 of the Act, therefore, there is no justification that disallowance under section 40(a)(i) of the Act could be made by the AO. In view of the same, therefore, the addition of Rs. 63,08,727/- as made by the AO on account of disallowance made u/s 40(a)(i) of the Act, is hereby deleted. Accordingly, Grounds No. 2, 3, 4 & 7 are allowed.' 9. The assessee is in the business of manufacture and export of footwear to various countries. It paid commission to non-resident commission agents for services rendered outside India. It claimed this payment as an expenditure. 10. The AO observed that on perusal of books of account of the assessee, it is seen that assessee has paid commission to a non-resident agent on exported goods amounting to Rs. 1,09,48,085/- during the year; that the Central Board of Direct Taxes has issued the Circular No.7 dated 22 October, 2009 withdraw....
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.... payment made is a composite payment in which a certain proportion of payment has an element of "income" chargeable to tax in India. The Supreme Court observed in CIT v. Toshoku Limited (125 ITR 525) held that 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(l)(i) of the Act.' 13. The assessee further relied on CIT v. Eon Technology (P.) Ltd. [2011] 15 taxmann.com 391/203 Taxman 266/343 ITR 366 (Delhi), wherein it has been held that export commission paid to non-resident was not taxable in India. 14. The assessee still further relied on the order of Mumbai ITAT in the case of Armayesh Global v. Asstt. CIT [2012] 21 taxmann.com 130/51 SOT 564, wherein it has been held that export commission earned by non-resident agent is not taxable in India. 15. The AO, however, did not agree with the stand taken by the assessee. He disallowed the as....
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....t 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 tax the income received on account of the transactions with the assessee as their business income in their country of residence; and that the role and responsibilities of these agents are as under - (i) to procure orders from buyers (ii) to negotiate price and other terms and intimate the same to the assessee (iii) to re-negotiate the terms/price if necessary, based on the instructions of the assessee (iv) follow up in getting purchase orders from customers and forward the same to the assessee (v) follow up regarding LC opening, shipment and payment 17. Against the aforesaid services rendered, these agents raise a debit note/invoice for commission at the agreed rate and the amount is remitted through proper banking channels to their bank account in their country of residence. 18. The AO has invoked the provisions of....
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....nbsp; ** [(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....
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....e 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 Act, 1961 - Income - Deemed to accrue or arise in India Assessment year 2007-08 - Assessee-company was engaged in business of development and export of software - During relevant assessment year, it had paid commission to its British parent/holding company ETUK on sales and amounts 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 acc....
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....sp; ** 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(l)(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." 22. In Dy. CIT v. Divi's Laboratories Ltd. [2011] 12 taxmann.com 103/131 ITD 271 (Hyd.), it wa....
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....refund; that as per section 237 read with section 199, it implies that only the recipient of the sum i.e., payee would seek a refund; that in view of the above, hence, no tax is deductible under section 195 on commission payments and, consequently, the expenditure on export commission payable to non-resident for services rendered outside India becomes allowable expenditure and the same is outside rigors of section 40(a)(ia); that in the instant case, the ld. CIT(A) observed that the Assessing Officer had not been able to establish that there was specific intention of the payee to receive the payment within the territory of India, therefore, the ld. CIT(A) rightly did not agree with the view taken by the Assessing Officer with regard to the addition made on this issue and the ld. CIT(A) was justified in directing the Assessing Officer to delete the said addition; and that after considering the totality of facts and the circumstances of the case, the order of the ld. CIT(A) on this issue was not to be interfered with and, accordingly, the same was to be upheld. 23. In Faizan Shoes (P.) Ltd. (supra), wherein also there was a similar issue of export commission being paid by a shoe m....
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....able 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(l)(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. 11. The facts of the present case are akin to the facts of the decision in Toshoku Limited case, referred supra. In the instant case also the assessee engaged the services of non-resident agent to procure export orders and paid commission. That apart, the Commissioner of Income (Appeals) as well as the Tribunal have correctly applied the principle laid down in GE India Technology Cen. (P.) Ltd. case, referred supra, to hold that the assessee is not liable to deduct tax at source when the non-resident agent provides services outside India on payment of commission". 24. Regarding....
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.... withdrawn, will make any difference as to bringing the commission payments within the ambit of tax as he has not adverted to the admitted position that there exists no business connection or permanent establishment of such agents in India. 28. It is not disputed that that the withdrawal of the Circulars No. 23 and 786 has been made on 22.10.2009 vide CBDT Circular No. 7 of 2009 and mere withdrawal of the circular does not negate the principles of income deemed to accrue or arise in India or outside India. The CBDT has not stated that any part of the circulars is contrary to law or that the circulars were wrongly issued or that the law has undergone changes holding their withdrawal. Thus, in respect of cases, which directly follow with the situations covered by the circulars, the liability to tax should continue to be in accordance with section 9 of the Act and its intent. The relevant sections, namely section 5(2) and section 9 of the Income-tax Act, 1961 not having undergone any change in this regard, the clarification in Circular No. 23 still prevails even after the withdrawal. No tax is therefore deductible under section 195 and consequently, the expenditure on export commis....
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....se and the decisions rendered by the Hon'ble Apex Court, we are of the considered view that the Ld. CIT(A) had decided the issue in accordance with law. Therefore, we hereby confirm the order of the Ld. CIT(A). 33. In Dy. CIT v. Farida Prime Tannery (P.) Ltd. [2014] 45 taxmann.com 174/64 SOT 145 (URO) (Chennai - Trib.), it has been held - "5. Heard both sides, perused orders of lower authorities and the case laws relied on. In all these appeals, Assessing Officer disallowed agency/sales commission paid by the assessee to the non-resident agents on the ground that assessee has not deducted TDS under section 195 of the Act and therefore sales commission paid by the assessee is not allowable expenditure under section 40(a)(i) of the Act. The Commissioner of Income Tax (Appeals) elaborately considered this issue and held that sales commission paid by assessee is not chargeable to tax in India as the services were rendered outside India by non-residents and therefore, provisions of section 195 have no application so as to disallow commission payments under section 40(a)(i) of the Act. While holding so, the Commissioner of Income Tax (Appeals) considered various decisions....
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.... 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 co-ordinate bench of this Tribunal, we sustain the order of the Commissioner of Income Tax (Appeals) in deleting the disallowance made under section 40(a)(i) of the Act. In assessee's case also these facts are comparable with the decision of the Apex Court and other decisions cited above. 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 said decision of Supreme Court takes into consideration the principles of income deemed to accrue or arise in India and outside India." 34. In CIT v. Model Exims [2014] 42 taxmann.com 446/222 Taxman 94/363 ITR 66 (All.), it has been held to the effect that the fact situation contemplated or clarified in the Explanation added by the Finance Act, 2010 is not ....
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....owance 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 where 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 Ltd. v. CIT AIR 1976 SC 1973, the issue related to payment of royalty, which falls u/s. 9(1)(vi) of the Income-tax Act and on this single score, this decision is not applicable to the facts of the present case, since the question herein is with regard to applicability of section 9(1)(i) of the Act. Further, the question raised before the Hon'ble Supreme Court in that case was that since the agreement was executed in England and the royalty was payable in England, no income accrued or arose in India. In the present case, on the other hand, it remained undisputed by the authorities below, that the recipient of the commission paid by the assessee had rendered their services for the procurement of export orders and the realiza....