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Divya Creation Versus ACIT, Circle- 2, Noida

TDS u/s 195 - non deduction of TDS on foreign agency commission outside India for promotion of export sales outside India - P.E. in India - income accrues or arises in India - agent principal relation - Held that:- Non-resident commission agents based outside India rendering services of procuring orders cannot be said to have a business connection in India and the commission payments to them cannot be said to have been either accrued or arisen in India. In view of the decisions cited above (supr .....

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14-9-2017 - SHRI R. K. PANDA, ACCOUNTANT MEMBER AND MS. SUCHITRA KAMBLE, JUDICIAL MEMBER For The Assessee : Shri Piyush Kaushik, Adv. For The Department : Shri Arun Kumar Yadav, Sr.DR ORDER PER R. K. PANDA, AM : This appeal filed by the assessee is directed against the order dated 07.07.2014 of CIT(A), Noida relating to assessment year 2010-11. 2. Facts of the case, in brief, are that the assessee is a partnership firm engaged in the business of manufacturing and export of plain and studded Gol .....

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Route De Cillers Le Lac, Les Chauchets, Les Fins 25,500/-, France and ₹ 57,52,086/- were paid to M/s Newtechno SA, Rue Des Fontaines 2 2087, Cornaux Ne, Switzerland as foreign agency commission for promoting the sale all over Europe. The assessee also furnished the copy of the agreement with the foreign commission agent. 3. The Assessing Officer noticed that the assessee has not deducted tax on such foreign agency commission as per the provision of section 195 of the I.T. Act. He, therefor .....

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hment or business connection in India, no part of their income accrues or arises in India under the provisions of section 5(2) read with section 9(1) of the I.T. Act. Further, since the payment is directly remitted to these agents in their countries it cannot be held to have been received by or on behalf of the agents in India and hence these agents are not liable to income tax in India on the commission received by the, from the assessee firm. 5. It was submitted that whether tax at source has .....

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ndirectly through or from any business connection in India and any assets or source of income in India. The provisions of Explanation 2 to section 9(1)(vii) of the I.T. Act which defines the term of business connection was brought to the notice of the Assessing Officer. It was explained that the analysis of this Explanation clearly solves the issue in the present case that assessee firm is not liable to deduct tax at source since foreign agents neither have any business connection in India nor h .....

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um to non-resident is liable to deduct tax at source if the said sum is chargeable under the provisions of this Act. The expression chargeable under the provisions of the Act in section 195(1) of the I.T. Act shows that the remittance has got to be of a trading receipt, the whole or part of which is liable to tax in India. If tax is not so assessable, there is no question of tax at source being deducted. 7. However, the Assessing Officer was not satisfied with the explanation given by the assess .....

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f M/s Divya Creation. Therefore, he inferred that the income of foreign agent has a real and intimate connection with the income accruing to the assessee and this relationship amounts to a business connection through or from which income can be deemed to accrue or arise to the non-resident. Rejecting the various explanations given by the assessee and relying on the decision of the AAR in the case of SKF Boilers and Driers Pvt. Ltd. reported in 68 DTR 106 and the decision of AAR in the case of Ra .....

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d in the Law, the lower authorities have grossly erred in holding that payment of agency commission of ₹ 62,12,609 outside India for promotion of export sales outside India is subject to tax withholding u/s 195. 2. That on the facts and circumstances of the case and in the Law, the lower authorities have grossly erred in confirming disallowance of ₹ 62,12,609 on account of agency commission u/s 40(a)(i) on the premise that it was subject to the requirement of tax withholding u/s 195. .....

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ubject matter of disallowance u/s 40(a)(i). 4. That without prejudice to the foregoing grounds and in the alternative the lower authorities have grossly erred in not allowing to the assessee the benefit of deduction u/s 10A on the enhanced amount of business income resulting from the aforesaid disallowance of agency commission. That the appellant craves leave to Add to and / or Amend, modify or withdraw the grounds outlined above before or at the time of hearing of the appeal. 10. Ld. counsel fo .....

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ed business for the assessee abroad. Referring to the decision of the Co-ordinate Bench of the Tribunal in the case of DCIT (International Taxation) vs. Welspun Corporation Ltd. reported in 77 taxmann.com 165, he submitted that the Tribunal in the said decision has held that the services of the nature rendered by non-resident commission agents cannot be treated as fees for technical services any way and the same is not chargeable to tax in the hands of the non-resident commission agent and conse .....

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rted in 363 ITR 66 has held that the agreement with non-resident commission agents for procuring orders does not involve rendering any managerial or technical services and consequently no tax withholding required on payment of said commission. The Hon'ble High Court has further held in the said decision that Explanation to section 9(2) inserted with retrospective effect by Finance Act 2010 does not apply to such non-resident commission agents. 14. Referring to the decision of the Hon'ble .....

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orts Pvt. Ltd. reported in 369 ITR 96 and CIT vs. Faizan Shoes Pvt. Ltd. reported in 367 ITR 155, he submitted that the Hon'ble High Court in the said decisions has held that the services rendered by a non-resident commission agent can at best be called as a service for completion of commitment and would not fall within the definition of fees for technical services and therefore section 9 is not applicable and therefore the question of tax withholding on same does not arises. 16. Referring t .....

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e reversed and the grounds raised by the assessee should be allowed. 18. Ld. DR on the other hand heavily relied on by the order of the CIT(A). 19. We have considered the rival arguments made by both the sides, perused the orders of the Assessing Officer and the CIT(A) and Paper Book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the Assessing Officer made addition of ₹ 62,19,609/- u/s 40(a)(i) on the ground that assessee has not ded .....

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n 5(2)(b) of the I.T. Act as the income has accrued in India when the right to receive the same came into existence. According to him although the nonresident agent has rendered services and procured orders abroad but the right to receive the commission certainly arise in India when the order gets executed by the assessee. According to him, the mere fact that the agent is to render services abroad and the commission is to be remitted to him abroad are wholly irrelevant for the purpose of determi .....

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India. The Tribunal while deciding the issue has also considered the two decisions of the AAR which has been relied on by the Assessing Officer as well as the CIT(A). 21. We find the Hon ble Allahabad High Court in the case of Model Exims (supra) has held that failure to deduct tax at source from payment to nonresident agents, who has their own offices in foreign country, cannot be disallowed, since the agreement for procuring orders did not involve any managerial services. It was held that the .....

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volve any managerial services. The agreement did not show the applicability or requirement of any technical expertise as functioning as selling agent, designer or any other technical services. 22. We find the Hon'ble Supreme Court in the case of Toshoku Ltd. (supra) has observed as under :- During the previous year relevant to the assessment year 1962-63, B, a dealer in tobacco in India, purchased tobacco and exported it to Japan and France through non-resident sales agents, a Japanese compa .....

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e company. There was a similar agreement with the French business house in relation to the corresponding area and similar credit and debit entries and subsequent remittance of the commission were made. The question was whether the commission earned by the non-resident sales agents could be taxed in India, treating B as representative assessee under s. 161 of the I.T. Act, 1961: Held, (i) that it could not be said that the making of the entries in the books of B amounted to receipt, actual or con .....

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