TMI Blog2012 (10) TMI 431X X X X Extracts X X X X X X X X Extracts X X X X ..... ssion paid to the non residents are not chargeable to tax under the provisions of the Act, no deduction of tax is required to be made u/s 195(1) of the Act and disallowance made u/s 40(a)(i)by Assessing officer is not sustainable - against revenue. - ITA No. 1776/Hyd/2011 - - - Dated:- 6-7-2012 - SHRI D. KARUNAKARA RAO AND SHRI SAKTIJIT DAY, JJ. Appellant by : Shri K. Viswanatham Respondent by : Shri K. Ranganathan ORDER PER SAKTIJIT DEY, J.M.: This appeal filed by the Revenue is directed against order dated 2-8-2011 of CIT (A)-V, Hyderabad and it pertains to the assessment year 1998-99. 2. Grounds raised by the Revenue read as under:- 1. The CIT (A) erred both in facts and law. 2. The CIT (A) erred in deleting the addition of Rs.80,50,703/- towards commission on export sales. 3. The CIT (A) ought to have appreciated the fact that the provisions of section 195 of IT Act are clearly applicable in the case of the assessee and as the assessee failed to deduct tax at source, the disallowance made u/s 40(a)(i) ought to have been upheld. 4. The CIT(A) ought to have held that the provisions of section 5(2)(a) are applicable as the commission p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... one on the oral request of the foreign agents. Therefore, the payment of commission is liable to be taxed in India u/s 5(2)(a) of the Act. The assessee having failed to deduct tax at source the entire commission amount was disallowed u/s 40(a)(i). The assessee challenged the addition in appeal before the CIT (A). The assessee contended before the CIT (A) that the non resident agents appointed by assessee did not carry on any business operations in India nor they have any permanent establishment in India. They acted as assessee s selling agents outside India. The commission earned by the non resident agents were for services rendered by them outside India. In these circumstances, the commission paid to them cannot be treated as income deemed to have accrued or arisen in India. The assessee submitted that the commission amounts were directly remitted to the agents and were not received by them or anyone else on their behalf in India. Relying upon the decision of Hon ble Supreme Court in the case of CIT vs. Toshoku Ltd. (125 ITR 525) and circular No.786 dated 7-2-2001 and Circular No.23 in F No.7A/38/69-IT(A)-11 dated 23-7-69. The assessee contended that the foreign agents are not c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t or on his behalf as per sec. 5(2)(a). (iii) The AO cannot make disallowance u/s 40(a)(i) only because the DDs were purchased from banks in Hyderabad and sent them through courier to the non resident agents in view of the decision of the Hon ble Calcutta High Court in case of Indian Aluminium Co. Ltd. Vs. CIT 140 ITR 114. (iv) CBDT Circular No.786 dated 7-2-2001 has clarified that deduction of tax at source will arise only of the payment of commission to non resident agent is chargeable to tax in India. In CBDT Circular No.23 dated 23-7-1969 it has been clarified that where the non resident agent operates outside India, no part of his income arises in India. (v) The DTAA between India and the concerned countries where the non resident agents are appointed also stipulates that the income or profits of an enterprise of a contracting state shall be taxable only in that state, unless the enterprise carries on business in the other contracting state through a permanent establishment situated therein. There is no material on record that the non resident agents had a permanent establishment in India. Therefore, as per DTAA also the commission payment are taxable only in the cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... u/s 40(a)(i) by inferring that since the DDs were purchased in India and sent through courier, it has been done at the request of the non resident agents even though there is nothing in the agreement to come to such an inference. 12. As is evident from the assessment order, excepting this inference by the AO, there is nothing on record to suggest that the income is chargeable to tax in India or the payment has been received by the non resident agents in India or by any other person on their behalf. There is also no finding by the AO that the non resident agents have a permanent establishment in India or have any business connection in India, by virtue of which the payment of commission would have accrued or arose in India. The facts available on record clearly suggest that the non resident agents did not carry out any business operations in India and has acted as selling agents of the assessee outside India. Therefore, the commission earned by them for services rendered by them outside India cannot be considered as income chargeable to tax in India. That apart the submission of the learned AR that DTAA between India and concerned countries stipulates that the income of an enter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s under an obligation to deduct tax at source u/s 195 of the Act in respect of the sums paid to them under the contracts entered into. It further held that the obligation of the assessee to deduct tax u/s 195 is limited only to the appropriate proportion of income chargeable under the Act. Thus, it can be seen that the said judgment in fact helps the assessee. The second question answered by the Supreme Court can be understood to mean that the obligation of the assessee to deduct tax u/s 195 is not there when the payment made to the non resident does not contain any proportion of income therein. In our view, right from the beginning, not only on the basis of the circulars of the Board, but also on the basis of the decision of the Tribunal in its own case, the assessee firmly believed that no part of the income paid to the foreign agent was taxable in India. Therefore, there was no question of deducting any tax at source on any proportion of the payment made to the non-residents. Thus, the judgment in the case of Transmission Corporation (supra) does not advance the case of the department in the present appeal. Finally, it may be pertinent to note that Circular No.786 dated 7-2-20 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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