TaxTMI 
TaxTMI 
2018 (5) TMI 2086
X X X X Extracts X X X X
X X X X Extracts X X X X
.... made u/s 40(a)(ia) on account of non deduction of taxes at source on payments for commission of sales exports arid legal and professional charges despite the fact that the assessee failed to deduct taxes at source u/s 195 of the I.T. Act on the payments made to non-residents without appreciating the fact that the income was accrued in-India and the assessee was under statutory obligation to deduct taxes at source. 4. Brief facts of the case are that the Assessing Officer has disallowed the amounts under section 40(a)(ia) as no TDS was deducted on the sales commission pertaining to exports paid to the parties operating abroad. The Assessing Officer held that even though the commission agents do not have any PE in India and the services were outside India and since the services were rendered for an Indian Company, TDS needs to be deducted. 5. During the hearing before us, the Ld. AR has argued based on the submissions made before the Ld. CIT(A). 6. The complete details of the arguments and the decision of the Ld. CIT(A) are as under: The appellant company had made payment to various parties for the above services. The expenses were incurred for services rendered ou....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s order in India (mainly or wholly) for the nonresident or for non -residents under the same management. c. As per circular No. 23 of year 1969: A foreign agent of India Exporter Operates in his home country and no part of his income arise in India. His commission is usually remitted directly to him outside India is not received by him in India. Therefore such an agent is not liable for tax on this commission in India. This view was reaffirmed by CBDT vide Circular No. 163 of the 1975. 4. As per Circular No. 786 of the year 2000. The deduction of tax at source under section 195 would arise if the payment of commission to the non-resident agent is chargeable to tax in India. In this regard attention to CBDT Circular No. 23 dated 23-07-1969 is drawn, where the taxability of* Foreign Agent of India Exporters. Was. considered along with certain other specific situations. It had been clarified then that where the non-resident agent operates outside the country. No part of his income arises in India. Further, since the payment is usually remitted directly abroad it cannot be held to have been received by or on behalf of the agent in India. Such payment....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... reply to your above referred letter, we hereby submit the following documents/information Point wise as per your requirement: The List of Parties with complete address along with amount of commission/legal and professional charges paid is enclosed as Annexure-A. Nature of service provided by each party is enclosed as Annexure-B. We would like to submit that after due negotiation we raise sale orders to our customers & in sale order the name of commission agent and percentage of commission payable is provided. The copies of some of the sales orders attached for your perusal. The commission is calculated on pre agreed percentage of sale value through particular commission agent. There is proper control over quality of service rendered, as commission is paid/credited to agent only when the amount of sale initiated through him is fully realized. The track record of agent as to promotion of the sales and timely realization of sales made through him plays a pivotal role in his quality of service. We hope you will find the above in order and suffice to your requirement" 3.2. I have given careful consideration to the issue in ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n which tax is required to be deducted as provided under the relevant Chapter, the provisions of this section can be invoked. Chapter-XVII deals with collection and recovery of taxes while part-B of this Chapter deals with tax deduction at source, the provisions relating to tax to be deducted out of payment made to a nonresident are provided in section 195 of the Act, which read as under : "195(1) Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest (not being interest on securities) 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: " 27. The most important terms in this section are "chargeable under the provisions of this Act". From this, it is very clear that only if an amount is chargeable under the Income Tax Act, the liability to deduct tax on the payment of such amount arises. Charge of income ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ccrue or arise in India'. Various instances of income considered to be deemed to accrue or arise in India to a nonresident are provided in section 9 of the Income Tax Act. For the purpose of adjudicating the issues arising in the present appeal, the relevant provisions are that of section 9(1 )(i) of the Act, which read as under : "9 (1) The following incomes shall be deemed to accrue or arise in India- (i) all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, [***] or through the transfer of a capital asset situate in India; [Explanation I]: For the purposes of this clause- (a) in the case of a business of which all the operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India; (b) in the case of a non-resident, no income shall be deemed to accrue or arise in India to him through or from operations which are confined....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t works mainly or wholly on behalf of a non-resident (hereinafter in this proviso referred to as to the principal nonresident) or on behalf of such nonresident and other non-residents which are controlled by the principal non-resident or have a controlling interest in the principal non-resident or are subject to the same common control as the principal non-resident, he shall not be deemed to be a broker, general commission agent or an agent of an independent status.]" 3.2.2 It is to be judged from the facts and circumstances of the present case, whether the impugned payments are deemed to accrue or arise in India to the respective recipients, as we have already mentioned that only those payments which are of the nature of sum chargeable under the provisions of the Act are exigible for provision of tax deduction at source. Here we are inclined to refer to the judgment of the Hon'ble Supreme Court in the case of GE India Technology Centre (P.) Ltd. v. CIT [2010] 327 ITR 456/193 Taxman 234/7 taxmann.com 18, whereby it has been held that section 195(1) of the Act uses the expression 'sum' chargeable under the provision of the Act and weightage is needed to be given....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ection 195 of the Act and, consequently, of section 40(a)(i), are inapplicable. The Hon'ble court has scanned the entire law on this aspect as under: "7. Under section 195(1), the tax has to be deducted at source from interest (other than interest on securities) or any other sum (not being salaries) chargeable under the Incometax Act in the case of non-residents only and not in the case of residents. Failure to deduct the tax under this section may disentitle the payer to any allowance apart from prosecution under section 276B. Thus, section 195 imposes a statutory obligation on any person responsible for paying to a non-resident, any interest (not being interest on securities) or any other sum (not being dividend) chargeable under the provisions of the Income-tax Act, to deduct income-tax at the rates in force unless he is liable to pay income-tax thereon as an agent. Payment to non-residents by way of royalty and payment for technical services rendered in India are common examples of sums chargeable under the provisions of the Income-tax Act to which the afore-stated requirement of tax deduction at source applies. The tax so collected and deducted is required to be p....
X X X X Extracts X X X X
X X X X Extracts X X X X
....gh the assessee had not made an application under section 18(3B) (now section 195(2) of the Income-tax Act). The application of section 195(2) presupposes that the person responsible for making the payment to the non-resident is in no doubt that tax is payable in respect of some part of the amount to be remitted to a non-resident but is not sure as to what should be the portion so taxable or is not sure as to the amount of tax to be deducted. In such a situation, he is required to make an application to the Income-tax Officer (TDS) for determining the amount. It is only when these conditions are satisfied and an application is made to the Income-tax Officer (TDS) that the question of making an order under section 195(2) will arise. In fact, at one point of time, there was a provision in the Income-tax Act to obtain a NOC from the Department that no tax was due. That certificate was required to be given to the RBI for making remittance. It was held in the case of Czechoslovak Ocean Shipping International Joint Stock Company v. ITO [1971] 81 ITR 162 (Cal.) that an application for NOC cannot be said to be an application under section 195(2) of the Act. While deciding the scope of sect....
X X X X Extracts X X X X
X X X X Extracts X X X X
....provisions of the Act", which as stated above, is an expression used only in section 195(1). Therefore, this court is required to give meaning and effect to the said expression. It follows, therefore, that the obligation to deduct TAS arises only when there is a sum chargeable under the Act. Section 195(2) is not merely a provision to provide information to the Income-tax Officer (TDS). It is a provision requiring tax to be deducted at1 source to be paid to the Revenue by the payer who makes payment to a non-resident. Therefore, section 195 has to be read in conformity with the charging provisions, i.e., sections 4, 5 and 9. This reasoning flows from the words "sum chargeable under the provisions of the Act" in section 195(1). The fact that the Revenue has not obtained any information per se cannot be a ground to construe section 195 widely so as to require deduction of TAS even in a case where an amount paid is not chargeable to tax in India at all. We cannot read section 195, as suggested by the Department, namely, that the moment there is remittance the obligation to deduct TAS arises. If we were to accept such a contention it would mean that on mere payment income would be said....
X X X X Extracts X X X X
X X X X Extracts X X X X
...., has to deduct and pay tax, even if the so-called deduction comes out of his own pocket and he has no remedy whatsoever, even where the sum paid by him is not a sum chargeable under the Act. The interpretation of the Department, therefore, not only requires the words "chargeable under the provisions of the Act" to be omitted, it also leads to an absurd consequence. The interpretation placed by the Department would result in a situation where even when the income has no territorial nexus with India or is not chargeable in India, the Government would nonetheless collect tax. In our view, section 195(2) provides a remedy by which a person may seek a determination of the "appropriate proportion of such sum so chargeable " where a proportion of the sum so chargeable is liable to tax. The entire basis of the Department's contention is based on administrative convenience in support of its interpretation. According to the Department, huge seepage of revenue can take place if persons making payments to non-residents are free to deduct TAS or not to deduct TAS. It is the case of the Department that section 195(2), as interpreted by the High Court, would plug the loophole as the said int....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nserted in section 195 which requires the payer to furnish information relating to payment of any sum in such form and manner as may be prescribed by the Board. This provision is brought into force only from April 1, 2008. It will not apply for the period with which we are concerned in these cases before us. Therefore, in our view, there are adequate safeguards in the Act which would prevent revenue leakage. Applicability of the judgment in the case of Transmission Corporation (supra) 10. In Transmission Corporation's case [1999] 239 ITR 587 (SC) a non-resident had entered into a composite contract with the resident party making the payments. The said composite contract not only comprised supply of plant, machinery and equipment in India, but also comprised the installation and commissioning of the same in India. It was admitted that the erection and commissioning of plant and machinery in India gave rise to Income-taxable in India. It was, therefore, clear even to the payer that payments required to be made by him to the non-resident included an element of income which was exigible to tax in India. The only issue raised in that case was whether TDS was applic....
X X X X Extracts X X X X
X X X X Extracts X X X X
....own that tax at source is deductible only from "sums chargeable" under the provisions of the Income-tax Act, i.e., chargeable under sections 4, 5 and 9 of the Income-tax Act." (underline provided & portion highlighted by us) 3.2.6. The aforesaid decision of Hon'ble Supreme Court has discussed the case law of Transmission Corporation which has been distinguished on the facts that in that case there was a composite contract having bearings in India. In the present case, the entire activity of sales done by the respective commission agents is outside the territories of India. The argument of the Assessing Officer that the sales pertain to Indian entity does not hold good ground because by that analogy each and every sale would become taxable in India. In consideration of the decided cases as above and the facts of the present case, it can be concluded that since there exists no income chargeable to tax having accrued or arisen to the foreign commission agents in India, therefore provisions of tax withholding are not applicable. Under such circumstances, there was no default as contemplated under section 40 (a) (ia) of Income Tax Act. 7. Ld. DR relied on the order of th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e Revenue are dismissed. 12. However before parting we find that commission on sales has been paid to one M/s Excel Enterprises, Ludhiana at S.No. 6 of the table (A.Y. 2011-12), Shroff Textile Export at S.No. 40, Taj Club Marketing Pvt. Ltd. at S.No. 45, Vijay Kumar Kapoor at S.No. 49 and Vinod Kumar Kirori at S.No. 50 (A.Y. 2012-13) are operating from India. Hence, the addition made by the Assessing Officer under section 40(a)(ia) to that extent stands confirmed. Order pronounced in the open Court. ============= Document 1 S. No. Name Address Amount 1 AARTI IMPEX 11, EAGLE PLAINS DRIVE, BRAMPTOR 196641 ON 1 6R 3M6,CANADA 2 AGENCIA FESMAR SA PO BOX NO.5.SAN PEDRO SULA, HONDRUS 257145 3 AMJ SINGAPORE 5A CRAIG ROAD,NEAR TANJONG BAGAR MARKET SINGAPORE 79560 4 AMR FAREK HASSIB DERHALI 56 GOMHORIA STREET DOWN 957285 TOWN CARIO, EGYPT 5 CARMEN TRADE LINKS 30 BALGOBIN AVENUE, QUATRE- 371848 BORNES, MAURITIUS 6 EXCEL ENTERPRISE-LDH LUDHIANA 352370 7 FA.ZAMAN NARAYNGANJ.BANGLADESH 1658907 8 GENTRACCO U.A.E (F.Z.E.) P.O BOX NO 20397.AJMAN, United Arab Emirates 52....
X X X X Extracts X X X X
X X X X Extracts X X X X
....7-08 METRO CENTER II, 21 LAMHING STREET KOWLOON BAY KOWLOON.HINGKONG, CHINA 45903 34 SOFEENE ENTERPRISES 35 TRADE LINE FAR EAST PTE LTD 36 VENZOLASCA LT 37 YAZOULAY Singapore 438459 Singapore 172539 MOSSACK & FONSECA & CO.PO 241720 BOX 3136,ROAD TOWN TORTOLA 64 AVENUE HASSAN 120935 Total SEGHIR CASSABLANCA MAROCCO 22127502 Sr No. Name Complete Address 1 MICCINESI E ASSOCIATI STUDIO LEGALE E Amount (Rs.) 1,622,774 TRIBUTARIO, PIAZZA SANT 2 MICCINESI E ASSOCIATI STUDIO LEGALE E TRIBUTARIO, PIAZZA SANT AMBROGION 8-20123, MILANO, ITALY AMBROGIO.N.8-20123.MILANO,ITAI Y 175,189 3 MICCINESI E ASSOCIATI STUDIO LEGALE E 76,161 TRIBUTARIO. PIAZZA SANT 4 S PRICEWATERHOUSECOOPERS LIMITED PRICEWATERHOUSECOOPERS LIMITED AMBROGION 8-20123, MILANO,ITALY JULIA HOUSE, 3 THEMISTOELES DERVIS STREET, CY-1086 NICOSIA.PO BOX 21612, CY-1581 NICOSIA.CYPRUS JULIA HOUSE,3 THEMISTOELES DERVIS STREET, CY-1086 NICOSIA.PO BOX 21612, CY-1581,NICOSIA, CYPRUS 332,192 118,703 6 7 RICARDO BINI STABB & ASSOCIATES ANA ANGHEL LAW OFFICE,....
X X X X Extracts X X X X
X X X X Extracts X X X X
....LODZ NRUTOWICZA 121,POLAND VISCONDE DE ABAETE STR N? 129 IST FLOOR, CEP: 03012-050 SAO PAULO, BRAZIL Commissio n on Sales Commissio n on Sales Commissio n on Sales OBILICEV VENAC 74 B.11271 SURCIN, Commissio SERBIA 477 EL-HORRENGA AVENUE, BULKELEY 21311,ALEXANDRIA, EGYPT NA 23 NIKOLA TASIC 24 OVERSEASCO TRADING & AGENCY 25 PACIFIC TEXTILE SOLUTIONS LTD 26 PERUVIAN CAMELID TRADING EIRL AV CAMINOS DEL INCA 2178.SURCO LIMA.PERU 27 PGT INTERNATIONAL LTD 28 PRIME VENTURE TEXCHEM LTD n on Sales Commissio n on Sales Commissio n on Sales Commissio n on Sales 18, LORD KITCHENER STREET,PORT Commissio LOUIS MAURITIUS SHATABDI CENTRE, SUITE # 15-A.292, Commissio MOTIJHEEL INNER CIRCULAR ROAD FAKIRAPOOL, DHAKA, BANGLADESH n on Sales n on Sales 29 PT. GLOBAL INDOREKSA ASIA JLN INDUSTRIAL SELATAN VIII, BLOK Commissio EE-6F KAWASAN INDUSTRI n on Sales JABABEKA II, CIKARANG- BEKASI JAWA BARAT, INDONESIA Document 4 30 RR TEXTILES INC 31 32 S.S.INTERNATIONAL RENNY INDAH SARI 33 SHAHID TRADING CO. TRADE LINE FAR EAST PTE LTD ....