TaxTMI 
TaxTMI 
2020 (11) TMI 479
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....Y 2013-14 is taken as the lead case and the decision rendered thereon would apply with equal force for AY 2014-15 also, except with variance in figures. 3. The first identical issue to be decided in this appeal is as to whether the Ld.CIT(A) was justified in deleting the disallowance made u/s 40(a)(i) of the Act in the sum of Rs. 4,18,50,792/- u/s 195 of the Act in the facts and circumstances of the case. 4. We have heard the rival submissions and perused the materials available on record. We find that assessee is engaged in the business of trading activity of import and export of pharmaceutical ingredients, chemicals and intermediates. We find that the assessee debited a sum of Rs. 4,18,50,792/- in its profit and loss account towards export commission paid to overseas agents, who arrange for exports and procure export orders for the assesse. The assessee pleaded that these overseas agents are not having any permanent establishment (PE) in India and are residents of the respective foreign countries. The Ld. AO did not heed to this contention of the assessee and proceeded to invoke the provisions of Sec. 40(a)(i) r.w.s 195 of the Act stating that the said payment required to b....
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....ourt in the case of CIT vs Modern Insulators Ltd reported in 369 ITR 138 (e) Decision of Hon'ble Madras High Court in the case of CIT vs Orient express reported in 330 taxmann.com 602 (f) Decision of Hon'ble Madras High Court in the case of CIT vs Farida Leather company reported in 238 taxmann.com 473 (g) Decision of co-ordinate bench of this Tribunal in the case of ACIT vs Pahilajarai Jaikishan reprted in 157 ITD 1187 (Mum Trib.) 6. It is not in dispute that the non-resident agents to whom commission was paid by the assessee have rendered services outside India for sale of the goods of the assessee outside India. It is not in dispute that the said non-resident agents do not have any PE in India and that they are domiciled in U.K and USA. In view of these facts, it could be safely concluded that there is no income chargeable to tax in India in terms of section 195(1) of the Act in the hands of the non-resident agents and accordingly, the provisions of section 195(2) of the Act would not come into operation at all. Reliance in this regard had been rightly placed by the Ld. CIT(A) on the decision of Hon'ble Apex Court in the case of GE Technology Cent....
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....Value (in Rs . ) Overseas Commission Value (in Rs . ) %age of Overseas Commission 2008-09 12,23,22,188.00 1,68,19,755.00 13. 75% 2009-10 16,93,05,845.00 1,05,30,824.00 6.22% 2010-11 6,00,73,432.00 12,01,469.00 2%. The assessee had duly submitted copies of agency agreement/contract and exclusivity agreement pertaining to 4 major overseas agents based in USA & Europe as well copies of ledger account of these agents. The four foreign agents to whom aforesaid payment of commission of Rs. 1.68 crore were made are as under: Sr. No. Name of the company Name of the country 1 Regal Rank Ltd UK 2 SRK Pharmachemie (Europe) GmBH . Germany 3 NJK Holdings LLC , USA 4 Roscio Alassandro Italy The Revenue is not doubting the genuineness of these commissions to overseas agents which was claimed by assessee as business expenses u/s 37(1) as that part of appellate order holding the issue in favour of the assessee has attained finality as Revenue has not challenged the said part of finding of learned CIT(A). The Revenue is mainly aggrieved in this appeal by infringement of Section 195(2) read with S....
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..... It was also submitted that these overseas commission were paid to overseas agents only after completion of registration and other formalities and achievement of sales target in terms of value and volume . The authorities below have perused the agency agreements. It is provided in the agreements that targets as to value and volumes are fixed for overseas agents to get commission and in case the performances are not forthcoming, the assessee will not be liable to pay these commissions. Thus, these commissions paid to overseas agents are linked to performance by way of export orders generated or import of raw material etc facilitated for the assessee. The assessee was new to export business and as this being the first year of exports , hence the assessee was required to get registration done with various authorities/agencies in foreign countries . The said overseas agents assisted assessee in getting itself registered and undertook work for marketing and sales of assessee's products for which necessarily expenses were incurred by these overseas agents but the pith and substance of the agency agreement and the work performed in substance was to generate export orders and to facilitat....
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....e could not controvert this position. It is important at this stage to refer to decision of Hon'ble Madras High Court in the case of Evolv Clothing Company Private Limited v. ACIT reported in (2018) 407 ITR 72(Mad.), wherein it was held as under: " 19. From the judgment and order of the learned Tribunal under appeal, it appears that the Revenue only contended that the payee in question had rendered technical services in the nature of systematic research to the appellant and received fee in lieu thereof, which was liable to be taxed as per Article 13 (Clause 4) of the Indo-Italian Double Taxation Avoidance Agreement (DTAA). 20. The learned Tribunal took note of the agreement between the appellant and the payee which, inter alia, provided as follows: "The SECOND PARTY agrees to undertake and carryout the following services on behalf of the FIRST PARTY: 1. To procure orders for the FIRST PARTY and to negotiate the terms of such orders and contracts with said foreign buyers but the terms thereof shall be subject to prior, written concurrence of the FIRST PARTY. 2. To carry out systematic market research with regard to the needs of the products in the....
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.... of sub-section(1) and be included in the total income of the non-resident whether or not the non-resident has a residence or place of business or business connection in India, and whether or not the nonresident has rendered services in India is attracted in the facts and circumstances of this case? 23. The first question necessarily and obviously has to be answered in favour of the appellant/assessee and against the Revenue, the question being covered by the judgment of Supreme Court in Toshoku Ltd., supra. The issue before the learned Tribunal was whether the appellant/assessee had paid for systematic research or for procuring export orders. It was all along the contention of the appellant/assessee that the foreign agent was paid for procuring orders and assessing the market. The learned Tribunal erred in concluding that there was no issue between the parties that the assessee had paid for systematic research. For the sake of convenience, the second, the third and the fourth questions are dealt with together. 24. The learned Tribunal found, on facts, on perusal of the agreement copies filed by the appellant/assessee that commission was paid to the forei....
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....1)(vi)(b)/9(1)(vii)(b) of the IT Act, which apply to utilization of services of business outside India, did not cover the assessee's case. 28. The Assessing Officer had also taken note of withdrawal of two circulars: (i) Circular No.786, dated 7.2.2000, dealing with payment of export commission, opining that withdrawal, being procedural in nature, would apply to proceedings pending; and (ii) Circular No.23 of 1969, which exhaustively dealt with subject of "Non residents Income accruing or arising through or from business connection in India - Liability to tax - Section 9 of the Income Tax Act, 1961". 29. From the Service Agreement with the agents abroad, it is clear that the service rendered is essentially brokerage service. The very first clause of the agreement states "to procure orders". The reference to market research abroad or co-ordination with the supplier or to ensure timely payment or making available its office space for visit by the suppliers, were ordinarily things which any agent or broker undertook incidental to brokerage service. 30. There is no finding that any of the commission agents had any place of business in India. Explanation 1....
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....ouble Taxation Avoidance Agreement. In any case, even if a non-resident Indian did have a permanent establishment, but income was earned without availing of such permanent establishment, the income for services rendered abroad could not have been liable for tax deduction at source. 33. Under Section 9(1)(vii)(b), income by way of fees for technical services payable by a person, who is a resident, is taxable income except where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India. In view of Explanation (2) to Section 9(1)(vii), technical services means any consideration, including lumpsum consideration, for rendering of any managerial, technical or consultancy services, including the provision of services of technical or other personnel, but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient. Service of market survey only to ascertain the demand for the product in the market is incidental to the function of a commission agent of procuring orders and is, in any cas....
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....ding of the Explanation, it is apparent that fees for technical services does not contemplate commission which is order specific and computable at a small percentage of the order value. Section 40(a)(i) does not contemplate order wise commission based on the order value. 40. For the reasons discussed above, the appeal is allowed and the questions framed are answered in favour of the assessee against the Revenue. No costs. Consequently, connected miscellaneous petition is closed. The aforesaid is the decision of Hon'ble Madras High Court in the case of Evolv Clothing Company Private Limited(supra) for AY 2009-10 wherein the Hon'ble Madras High Court has referred to decision of Hon'ble Supreme Court in the case of GE Technology Centre Private Limited v. CIT (2010) 327 ITR 456(SC) , wherein Hon'ble Supreme Court held that what is relevant is the sum chargeable to income-tax under the provisions of the 1961 Act before provisions for deduction of income-tax at source u/s 195 come into service. Thus merely because the assessee has not made an application u/s 195(2), it will not bring the said sum chargeable to income-tax which otherwise is not chargeable to income-tax w....
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....99 taxmann.com 154(Guj.) , wherein Hon'ble Gujarat High Court held that on payments made to overseas agents towards commission for export orders will not entail deduction of income-tax at source u/s 195 and no disallowance u/s 40(a)(i) is warranted by holding, as under: "Revenue is in appeal against the judgment of the Income Tax Appellate Tribunal dated 19.04.2018 raising following questions for our consideration: "A. Whether the Appellate Tribunal had erred in law and on facts in upholding the order of the CIT(A) deleting the addition made on account of disallowance u/s. 40(a)(ia) of the Act for non deduction of tax on commission payable to foreign agents of Rs. 1,20,72,972/-? B. *** " 2. Question A pertains to disallowance made by the Assessing Officer under section 40(a)(ia) of the Income-tax Act, 1961 ['the Act' for short] for the failure of the assessee to deduct tax at source on exemption paid to foreign agents. This issue has been considered in Tax Appeal No. 1232 of 2018 in following manner: "1. The issue arises in relation to assessment year 2011-12. During the course of assessment proceedings, the Assessing Officer not....
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....ct would not arise. This aspect was elaborated by the Supreme Court in case of GE India Technology Center P. Ltd (supra) holding that on mere remittances of an amount to non-resident, duty to deduct tax at source would not arise unless such remittances contains wholly or partly taxable income. 5. Section 9 of the Act carries the heading "income deemed to accrue or arise in India. Sub-section (1) of section 9 provides that in following incomes, contained in various clauses therein, shall be deemed to accrue or arise in India. Clause (i) of sub section (1) provides that all income accruing or arising, whether directly or indirectly, through or from any business connection in India or through or from any property in India or through or from any asset or source of Income in India or through the transfer of a capital asset situate in India shall be deemed to accrue or arise in India. 6. In the present case, as noted, admitted facts are that the non-resident agents appointed by the assessee for procuring export orders do not have permanent establishment in India. Their agents are situated outside India. Their activities as commission agents are being carried out outside....
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....ssion to non-residents for services rendered in sales and marketing of assessee's product as commission agent outside India. We observe that the agents were notarized and not having fixed base in India and have rendered all the sales and marketing services outside India. We have also perused the judicial pronouncements of the Hon'ble Supreme Court in the case of GE India Technology CEN Private Limited v. CIT [2010]193 Taxman 234(SC), wherein, it was held that section 195 gets attracted in cases where payment made is a composite payment in which a certain proportion of payment has an element of income chargeable to tax in India and prayer seeks a determination of appropriate proportion of sum chargeable. We are of the considered view that the assessee has paid commission to non-residents in respect of services rendered abroad and the non-residents has not carried any business operation in India, therefore, we find that the assessee is not liable to deduct tax at source. We have also noticed that the assessing officer has not controverted the claim of the assessee that commission was paid to non-residents in respect of services rendered abroad. After looking to the fact as st....
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....on [1] of Section 195 of the Act would not apply. The fundamental principle of deducting tax at source in connection with payment only, where the sum is chargeable to tax under the Act, still continues to hold the field. In the present case, the Revenue has not seven seriously contended that the payment to foreign commission agent was not taxable in India. 6. Tax Appeal is therefore dismissed. We have observed that the assessee has rightly relied on the decision of Hon'ble Madars High Court in CIT v. Farida Leather Company in Tax Case Appeal No. 484 of 2015 , wherein Hon'ble Madras High Court decided the appeal in favour of the taxpayer on the ground that even if the taxpayer has not applied for certificate from AO u/s 195(2) but since the sum paid to non resident is not chargeable to incometax under the provisions of the 1961 Act, no disallowance u/s 40(a)(i) is warranted, by holding as under:- "2.4 Aggrieved over the order of the Income Tax Appellate Tribunal, the Revenue has preferred this Appeal, raising the following substantial questions of law:- "1. Whether on the facts and in the circumstances of the case, the Tribunal was right in holdin....
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....neither business connection in India nor they have permanent establishment in India, they are liable to be taxed in India. 5.1 Yet another contention of the learned counsel for the assessee is that: (a) the assessee paid the amount by way of commission to foreign agents for the services rendered outside India; (b) the Tax Deduction at Source (TDS) is required to be made on all payments to non-residents, only if such payments are liable to be taxed in India. (c) following the decision of this Court, CIT v. Faizan Shoes (P.) Ltd. [2014] 367 ITR 155/226 Taxman 115/48 taxmann.com 48 (Mad.), the assessee is not liable to deduct tax at source, when the non-resident agent provides services outside India on payment of commission. 5.2 The contention of the Revenue is that such services are attracted by Explanation (2) to Section 9 (1) (vii) of the Act and therefore TDS certificate is essential. 6. Whether this contention is correct, is the issue to be decided. 7. In order to appreciate this contention, it is necessary to consider the relevant provisions of the Act:- (i) Section 40(a)(i) of the Act :- "Section 40 - Amounts not deductible: ....
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.... the assessee has deducted and paid the tax on such sum on the date of furnishing of return of income by the resident payee referred to in the said proviso.' (ii) Explanation 2 to Section 195(1) of the Act :- 'Section 195 - Other sums: (1) Any person responsible for paying to a non-resident not being a company, or to a foreign company, any interest (not being interest referred to in section 194LB or section 194LC) or section 194LD 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 mode, whichever is earlier, deduct income-tax thereon at the rates in force : Provided that in the case of interest payable by the Government or a public sector bank within the meaning of clause (23D) of section 10 or a public financial institution within the meaning of that clause, deduction of tax shall be made only at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode : Provided further that no su....
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....r any other mode. The taxability of such amount in the hands of the payee or occasioning of the taxable event is alien for the purpose of Section 195(1) of the Act. 7.4 Section 195(2) is an enabling provision, enabling an assessee to file an application before the Assessing Officer to determine the appropriate proportion of the sum chargeable and upon such determination, the tax has to be deducted under Section 195(1) of the Act. The payment is made credited to the account of the payee. 8. The question now is, whether the assessee ought to have deducted tax at source as contemplated under Section 195 of the Act, when the assessee paid commission to foreign agent. 9. This question has been answered by the Hon'ble Supreme Court, in the case of G.E.India Technology Centre (P.) Ltd. (supra), in which, it is very categorically held that the tax deducted at source obligations under Section 195(1) of the Act arises, only if the payment is chargeable to tax in the hands of the non-resident recipient. 9.1 Therefore, merely because a person has not deducted tax at source or a remittance abroad, it cannot be inferred that the person making the remittance, namely....
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....magination, it cannot be said that the transaction partakes the character of "fees for technical services" as explained in the context of Section 9(1)(vii) of the Act. 12. As the non-residents were not providing any technical services to the assessee, as held above and as held by the Commissioner of Income Tax (Appeals), the commission payment made to them does not fall into the category of "fees of technical services" and therefore, explanation (2) to Section 9(1)(vii) of the Act, as invoked by the Assessing Officer, has no application to the facts of the assessee's case. 13. In this case, the commission payments to the non resident agents are not taxable in India, as the agents are remaining outside, services are rendered abroad and payments are also made abroad. 14. The contention of the learned counsel for the Revenue is that the Tribunal ought not to have relied upon the decision G.E.India Technology's case, cited supra, in view of insertion of Explanation 4 to Section 9(1)(i) of the Act with corresponding introduction of Explanation 2 to Section 195(1) of the Act, both by the Finance Act, 2012, with retrospective effect from 01.04.1962. ....