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TMI Blog2011 (4) TMI 1212X X X X Extracts X X X X X X X X Extracts X X X X ..... ; 60,45,81,694 While remitting the above payments, the assessee has not deducted the tax at source and therefore, the Assessing Officer was of the view that the expenditure is not to be allowed in view of the provisions of section 40(a)(ia) of the Act. The Assessing Officer therefore, asked the assessee to explain as to why the expenditure be not disallowed. The assessee stated that the tax was not deducted at source on account of Circular No. 786, dated February 7, 2000 ([2000] 241 ITR (St.) 132) issued by the Central Board of Direct Taxes. The Central Board of Direct Taxes has withdrawn the circular dated February 7, 2000 vide Circular No. 7 of October 22, 2009 ([2009] 318 ITR (St.) 1) and subsequent circular is applicable from October 22, 2009 and hence will not be applicable in respect of the payments made before that date. According to the Assessing Officer, the assessee was liable to deduct the tax at source on payments made to non-resident in view of Circular No. 7 dated October 22, 2009. Since the assessee has not deducted the tax at source, therefore, the Assessing Officer disallowed a sum of Rs.6,04,58,699. While completing the assessment, the Assessing Officer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . On this issue the hon'ble Supreme Court in the case of CCE v. Mysore Electricals Industries Ltd. [2006] (204) ELT 517 (SC) and in the case of Suchitra Components Ltd. v. CCE [2009] 20 VST 726 (SC) ; 12 STT 25 has held that a beneficial circular has to be applied retrospectively while an oppressive circular has to be applied prospectively and, therefore, when the circular is against the assessee it has to be applied prospectively. The hon'ble Supreme Court in another case of State Bank of Travancore v. CIT [1986] 158 ITR 102 (SC) has held that circulars which were in the nature of concessions can always be withdrawn prospectively. Since the Assessing Officer has given no other reasoning therefore, keeping in view the aforesaid hon'ble apex court judgments in my considered view when the said Circular No. 7 of 2009, dated October 22, 2009 was not available at the time of making payment of commission and at that time Circular No. 786, dated February 7, 2000 was in force regarding non-deduction of tax under section 195 to the non-resident agent operating outside country and therefore, in my considered view under these circumstances the provisions of section 40(a)(ia) cannot be ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax at source is not required to be deducted. The learned authorised representative placed reliance on the following decisions : (1) Joint CIT (Asstt.) v. George Williamson (Assam) Ltd. [2008] 305 ITR (AT) 422 (Gauhati) ; 16 ITD 326. (2) Deputy CIT v. Hyderabad Industries Ltd. [2008] 34 SOT 98 (Hyd). (3) Ind Telesoft P. Ltd., In re [2004] 267 ITR 725 (AAR). (4) Spahi Projects P. Ltd., In re [2009] 315 ITR 374 (AAR) in which it has been held that no tax at source is required to be deducted in view of Circular No. 786 dated February 7, 2000 and also as per article of the Double Taxation Avoidance Agreement. (5) Deputy CIT v. Sanjiv Gupta 50 DTR (Lucknow) (Tribunal) 225 in which it. has been held that circular dated October 22, 2009 cannot be applied retrospectively in respect of payment made before that date. We have heard both the parties. The Assessing Officer had disallowed the commission in respect of payments to two parties on the ground that such parties have not rendered any services. The learned Commissioner of Income-tax (Appeals) while deciding the appeal has held that the disallowance of commission made by the Assessing Officer was not in order. It means that the lear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from operations which are confined to the shooting of any cinematograph film in India. Explanation 2.-For the removal of doubts, it is hereby declared that 'business connection' shall include 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 non-resident; 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 non-resident : 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 cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inding of the learned Commissioner of Income-tax (Appeals) that the non-residents have provided services for earning commission. The services have been rendered outside India. The commission so earned by the non-resident is business profit. As per the Double Taxation Avoidance Agreement between India and the U. K. and the Double Taxation Avoidance Agreement between India and the U. A. E., it is mentioned in article 7 of both Double Taxation Avoidance Agreements that business profit can be taxed in the other Contracting State in case the enterprise of a Contracting State is having a permanent establishment in the other Contracting State. It is not the case of the Revenue that the non-resident companies are having their permanent establishment. Hence, even if the commission has been received by the non-residents on account of the business connections mentioned in section 9(1)(i) of the Act the same is not chargeable in India because such non-resident companies are not having any permanent establishment. The Central Board of Direct Taxes Circular No. 333, dated April 2, 1982 ([1982] 137 ITR (St.) 1B) has stated that the specific provision in the Double Taxation Avoidance Agreement is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yment received by the non-resident company from the television channel, etc. for the use of satellite which was taken on lease by non-resident company. In this case, the hon'ble Delhi High Court has considered the applicability of clause (i) of section 9(1) of the Act. Section 9 is a deeming provision and if the situation specified therein exists then the income is to be considered as deemed to have accrued or arisen in India for applicability of section 9(1)(i), the income can be deemed to accrue or arise in India if there are certain operations carried out in India. It would be useful to reproduce the held portion in respect of section 9(1)(i) as under (headnote) : "Held, (i) that under the agreement with television channels, the role attributed to the assessee was as follows : (i) programmes were uplinked by the television channels (admittedly not from India) ; (ii)after receipt of the programmes at the satellite (at locations not situated in Indian airspace), these were amplified through complicated process ; and (iii) (interest income) the programmes so amplified were relayed in the footprint area including India where the cable operators caught the waves and passed them over ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ([2000] 241 ITR (St.) 132), the commission income of the agent was not liable to tax in India and consequently there was no obligation on the part of the assessee to deduct tax at source at the time of making payment to C." We also agree with the view taken by the learned Commissioner of Income-tax (Appeals) that TDS was not required to be deducted at source on account of Circular No. 786 dated February 7, 2000. Circular No. 7 of October 22, 2009 cannot be considered retrospective to make it applicable for payments before that date. This has been considered by the Lucknow Bench in the case of Deputy CIT v. Sanjiv Gupta 50 DTR (Lucknow) (Tribunal) 225. The hon'ble apex court in the case of GE India Technology Centre P. Ltd. v. CIT [2010] 327 ITR 456 (SC) has held that in case the whole remittance is not chargeable in India then there is no question of tax at source being deducted. Since the tax at source is not required to be deducted section 40(a) will not be applicable. It is further noticed that section 40(a)(ia) refers to commission payable to a resident. Hence, this provision is not at all applicable. Section 40(a) is applicable in respect of payments to nonresidents and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, 2010 that the place of rendering of services or existence of business connection and place of business or residence of a non-resident are not relevant at all for taxability of interest, royalty or fee for technical services. 12. On the facts and in the circumstances of the case and law, the learned Commissioner of Income-tax (Appeals) erred in holding that bona fide belief can exonerate the assessee from its liability of withholding tax under section 195 of the Income-tax Act 13. On the facts and in the circumstances of the case and law, the learned Commissioner of Income-tax (Appeals) erred in holding remittances made for advertisement and subscription cannot be treated as fee for technical services irrespective of the fact that as per Explanation 2 to section 9(1)(vii) a wide definition of the words fee for technical services has been given which includes services of a managerial, technical or consultancy nature. 14. The appellant craves to add, amend, modify or alter any grounds of appeal at the time or before the hearing of the appeal." The serial No. in the grounds of appeal have been mentioned as 8 to 14. Actually, the serial Nos. should have been 1 to 7 as is evident ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re is no liability to tax in India on payment of selling commission. (7) As per copy of the chartered accountant certificate, the assesseecompany contended that no TDS is required to be deducted in respect of technical services to a non-resident of Germany in case the non-resident is an individual. The Assessing Officer has considered the reply of the assessee. An Explanation was inserted in section 9 by the Finance Act, 2007 with retrospective effect from June 1, 1976 to clarify that where income is deemed to accrue or arise in India under clauses (v), (vi) and (vii) of sub-section (1) of section 9 then such income shall be included in the total income of the non-resident regardless of whether the non-resident has a residence or place of business or business connection in India. The Explanation inserted by the Finance Act, 2007 with retrospective effect from June 1, 1976 has been substituted by the Finance Act, 2010 with retrospective effect from June 1, 1976. As per retrospective Explanation introduced by the Finance Act, 2010, the income covered under clauses (v), (vi) and (vii) of sub-section (1) of section 9 is to be deemed to accrue in India irrespective of the fact as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olicits exhibitors there in the territory allotted to him but the right to receive the commission arises in India only when the exhibitor participates in India International Food and Wine Show (to be held in India), and makes full and final payment to the applicant in India. The commission income would therefore, be taxable under the Act in view of the specific provisions of section 5(2)(b) read with section 9(1)(i) of the Act. The facts that the agents render services abroad in the form of pursuing and soliciting the participants and that the commission is remitted to him abroad are wholly irrelevant for the purpose of determining the situs of his income." The Assessing Officer has referred to the following decisions : (1) Wallace Pharmaceuticals P. Ltd., In re (A. A. R. No. 658 of 2005 [2005] 278 ITR 97 (AAR)) In this case, the fee for technical services was being paid by the resident. The benefit of consultancy services for promoting sales was utilised in India. It was therefore, held that withholding of tax was required to be made. (2) South West Mining Ltd., In re (A.A.R. No. 660 of 2005 [2005] 278 ITR 233 (AAR)) In this case also, the fee was being paid to the consultant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ustified in creating the demand for TDS liability along with interest. The learned Commissioner of Income-tax (Appeals) also confirmed the action of the Assessing Officer for creating the demand for non-deduction of tax at source in respect of technical consultancy payment to the extent of Rs.2,90,037 and paid on April 30, 2009 and June 24, 2008. The learned Commissioner of Income-tax (Appeals) further held that no TDS was required to be deducted in respect of sales commission. Thus the appeal of the assessee was partly allowed. Before us, the learned Departmental representative drew our attention to the observations of the learned Commissioner of Income-tax (Appeals) made at page 15 of the appellate order. The learned Commissioner of Income-tax (Appeals) observed that the assessee-company has itself made TDS on sales commission remittances made on February 5, 2010 and February 6, 2010. From this observation, the learned Department representative stated that the learned Commissioner of Income-tax (Appeals) was of the view that TDS was to be deducted in respect of sales commission paid to non-resident as the same was chargeable in India. The learned Departmental representative drew ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has categorically held that executive circulars, if contrary to the statutory provisions have no existence in the eyes of law. (viii) There is no disputing the fact that after withdrawal of the circular the assessee itself is deducting tax at source from the remittances to the non-residents. Thus the chargeability of tax of the remittances is not disputed. (ix) After the retrospective insertion of the Explanation below section 9, the hon'ble Income-tax Appellate Tribunal has continually been applying the said position of law to all the pending appeals which is evident from the decision of the Mumbai Bench in the case of Ashapura Minichem Ltd. v. Asst. DIT [2010] 131 TTJ (Mumbai) 291 and Linklaters LLP v. ITO [2011] 9 ITR (Trib) 217 (Mumbai) in the appeals for the assessment years 2008-09 and 1995-96 respectively. (x) That the levy under section 201(1) and 1A) is statutory and mandatory in nature and cannot be waived as has been held by the hon'ble apex court in the case of CIT v. Eli Lilly and Co. (India) P. Ltd. [2009] 312 ITR 225 (SC). (xi) That the question of 'bona fide' belief does not arise in determining the charge of section 201(1) and (1A) which is automatic in ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on or enjoyment of the right, property or information for which a payment described in paragraph 3(a) of this article is received ; or (b) are ancillary and subsidiary to the enjoyment of the property for which a payment described in paragraph 3(b) of this article is received ; or (c) make available technical knowledge, experience, skill, knowhow or processes or consist of the development and transfer of a technical plan or technical design." It was stated that managerial services are not covered under article 13. Our attention was drawn to the fact that the non-resident companies are not having their permanent establishment in India and therefore, the business income of the non-resident is not chargeable in India. The learned authorised representative has relied upon the following decisions : (1) Suchitra Components Ltd. v. CCE 2007 (115) ECC 2007 ; (2) CCE v. Mysore Electricals Industries Ltd. [2006] 204 ELT 517 (SC) ; (3) GE India Technology Centre P. Ltd. v. CIT [2010] 327 ITR 456 (SC) ; (4) Ind Telesoft P. Ltd. In re [2004] 267 ITR 725 (AAR) ; (5) Ruling of the AAR in the case of Spahi Projects P. Ltd., In re [2009] 315 ITR 374 (AAR) ; (6) CIT v. Sara International Lt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to ascertain that the payments made to a non-resident is either wholly or in part chargeable to tax. The Special Bench at page 97 and at para 54 has observed as under : "Two specific issues, in our opinion, required such explanation. One issue is as to who decides whether the payment made to the non-resident is chargeable to tax or not. Based on the language used in section 195(2) (explained by us in paragraph 26) and on the basis of the principles laid down by the superior courts we have come to the conclusion that at the first instance it is the payer who decides whether the payment has any income character or not. The second issue is whether the payer can enter into an exercise which almost amounts to determining the tax liability of the payee which further entails action on the part of the Assessing Officer to enter into the said exercise. On the basis of the alternative procedure (explained by us in paragraph 29), and on the basis of various judgments, we have come to the conclusion that the assessee and the Assessing Officer both may enter into such an exercise." In the instant case, the assessee was under bona fide belief that payments made to a non-resident are not charge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Samara and M/s. Sinotruck-Ural Ltd. The Double Taxation Avoidance Agreement between India and Russia is available at page [1998] 233 ITR (St.) 90. It is mentioned in article 7 of the Double Taxation Avoidance Agreement that business profit is to be taxed in the other Contracting State in case the enterprise in Contracting State is having a permanent establishment in the other Contracting State. Both the concerns are not having permanent establishments and therefore, the sales commission is part of the business profits of the non-resident and is not chargeable in India. However, paragraph 4 of article 12 of the Double Taxation Avoidance Agreement between India and Russia says that fees for technical services means payment of any kind in consideration for rendering any managerial, technical or consultancy services. Copies of the agreement with abovereferred to with the Russian companies are available at pages 7, 8, 12 and 13 of the paper book. As per agreement, the agents were to provide services for the sale of goods. From the agreement, one can infer that the agent is providing any managerial services. The services so provided cannot be considered as fee for technical services. On ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndering service in India and the utilisation of the service in India laid down by the hon'ble Supreme Court of India in Ishikawajima-Harima Heavy Industries Ltd.'s case for attracting the tax liability under section 9(1)(vii) remain untouched and unaffected by the Explanation to section 9(2) as per the amendment done by the Finance Act, 2007. The criteria of residence, place of business or business connection of a nonresident in India for fastening the tax liability has been done away with. Hence, the amendment by the Finance Act, 2010 has done away with rendering of service in India. However, the Explanation to section 9(2) is applicable to clauses (v), (vi) and (vii) of section 9(1) and is not applicable to section 9(1)(i) of the Act. In the instant case, the sales commission is business profit of the non-resident. In the absence of a permanent establishment, such sales commission was not chargeable and therefore, there was no need for deducting the tax at source. Similarly, the payments in respect of subscription and advertisement cannot be considered to be covered under fees for technical services and therefore, no TDS was required to be deducted. The learned Commissioner of In ..... X X X X Extracts X X X X X X X X Extracts X X X X
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