TMI Blog2015 (1) TMI 736X X X X Extracts X X X X X X X X Extracts X X X X ..... he AO, after considering certain decisions relied by the assessee favouring non-deduction of tax at source in the present circumstances, accepted the assessee’s contention. The fact that the decision of the Authority for Advance Ruling, relied by the ld. CIT, favours the Revenue’s case, at the maximum, makes the issue about deduction of tax at source from foreign commission, a debatable one. In view of such a cleavage of opinion, this debatable issue goes outside the purview of section 263. We, therefore, set aside the impugned order. Decided in favour of assessee. - ITA No.4761/Del/2014 - - - Dated:- 12-1-2015 - SHRI R.S. SYAL AND SHRI A.T. VARKEY, JJ. For The Appellant : S/Shri Satish Aggarwal Dharender Kumar, CA For The Respondent : Shri J.P. Chandrakar, Sr. DR ORDER PER R.S. SYAL, AM: This appeal by the assessee is directed against the order passed by the CIT u/s 263 of the Income-tax Act, 1961 (hereinafter also called the Act ) on 8.7.14 in relation to the assessment year 2011-12. 2. Briefly stated, the facts of the case are that the assessee is engaged in manufacturing of engineering items. The AO observed during the course of assessment proceed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he non-resident did not receive such income in India inasmuch as the assessee made payment for such commission to the non-resident outside India. Section 7 defines Income deemed to be received . It refers to the annual accretion to the balance at the credit of an employee participating in a recognized provident fund; transferred balance in a RPF to some extent; and the contribution made by the Central Government or any other employer to the account of an employee under Pension Scheme referred to in section 80CCD. From the description of the contents of section 7, it can be seen that the commission received by a non-resident cannot be characterized as income deemed to be received in India. The next ingredient of section 5(2) is the income which accrues or arises in India. Since the chargeability to tax under this segment is attracted if the income accrues or arises to the non-resident in India, it becomes crucial to find out the place where income from export commission accrues or arises. In this regard, the source of accrual or arising of income cannot be relevant because the incidence of tax is attached with the place of accrual of income and not its source. Ordinarily, there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in India, the applicability of clause (i) to this extent is ruled out. As, admittedly, the nonresident payee carried out his operations outside India, the command of clause (i) of section 9(1) cannot apply. The other six clauses of section 9(1), namely, clauses (ii) (iii) dealing with income under the head Salaries ; clause (iv) dealing with Dividend ; clause (v) dealing with Interest ; clause (vi) dealing with Royalty ; and clause (vii) dealing with Fees for technical services , have no application to the facts and circumstances of the instant case. The amount of commission paid to the nonresident cannot be described as salary or dividend or interest or royalty or fees for technical services. 5. The argument of the ld. DR that Explanation below section 9(2) will bring the instant case within the fold of section 9(1), is devoid of any merit. This Explanation simply states that for the purposes of this section, income of a non-resident shall be deemed to accrue or arise in India under clauses (v) or (vi) or (vii) of sub-section (1) and shall 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the payee, there can be no question of deducting any income-tax at source from such payment. Only if the amount is chargeable to tax in the hands of the recipient that the question of deducting any tax at source therefrom arises. In an earlier para, we have seen that the export commission is not chargeable to tax in the hands of nonresident in terms of section 5(2) of the Act. The natural outcome, which, therefore, emerges is that there can be no obligation of the assessee-payer to deduct tax at source on such commission payment to the non-resident. 8. Now, we turn to the amendment to section 195, which has been invoked by the ld. CIT to fortify his view that the assessee was required to deduct tax at source before making payment of commission to the non-resident. Before evaluating such a submission, it would be apposite to consider the prescription of the Explanation 2, as under:- Explanation 2. For the removal of doubts, it is hereby clarified that the obligation to comply with sub-section (1) and to make deduction thereunder applies and shall be deemed to have always applied and extends and shall be deemed to have always extended to all persons, resident or non-resident, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st of the Revenue on account of non deduction of tax at source from the commission payment to the non-resident and the consequential non-making of disallowance u/s 40(a)(i) of the Act. 10. The ld. DR vehemently accentuated on Circular no. 7 of 2009 to contend that with the withdrawal of the earlier benevolent circulars on this issue, the instant commission payment has become chargeable to tax in the hands of the payee and in the absence of the assesee having deducted tax at source, the ld. CIT was justified in setting aside the assessment order allowing deduction for such commission payment. 11. We do not find any force in this argument. It is relevant to note that Circular no 23 dt. 23/07/1969 clarified that no part of the income of a foreign agent of Indian exporter arises in India and hence such an agent is not liable to income-tax in India on the commission. Then circular no. 786 dt. 7/02/2000 further elaborated the consequence of Circular no. 23 by stating that since such commission income of foreign agent is not liable to tax in India, no tax is therefore, deductible at source under section 195 and consequently the export commission payable to a nonresident for services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it may, it is important to note that it is not a solitary precedent available on the subject. The Hon ble jurisdictional High Court in Director of Income-tax (International Taxation) vs. Panalfa Auto Elektrik Ltd. (2004) 272 CTR (Del) 117, has held that the services rendered by non-resident agent for procuring export orders for the assessee cannot be held as fees for technical services u/s 9(1)(vii) of the Act. In this case, the assessee made an application u/s 195(2) for authorization to remit certain amount as commission for arranging export sales and realizing payment to non-resident company. The AO held that the commission payment was taxable as fees for technical services u/s 9(1)(vii) of the Act. That is how, when assailed, the Hon ble High Court held that the payment of commission cannot be considered as fees for technical services in terms of section 9(1)(vii) so as to call for any deduction of tax at source. The Hon ble Madras High Court in CIT vs. Faizan Shoes (P) Ltd. (2014) 272 CTR (Madras) 170, has also held that no disallowance can be made u/s 40a(i) in respect of commission paid to non-resident agent for providing services outside India. 14. At this juncture, it ..... 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