TMI Blog2018 (10) TMI 582X X X X Extracts X X X X X X X X Extracts X X X X ..... re of the opinion that the income of the foreign agents is not chargeable to tax in India, as they do not have any ‘business connection’ as per provisions of section 9 of the income tax act. In absence of any business connection, the income is not chargeable to tax under section 5 of the income tax act of the non-resident foreign agents. Thhe natural consequences is that on such payment assessee is not obliged to deduct tax at source under section 195 of the income tax act. The learned Commissioner of income tax appeals has relied upon the decision of the jurisdictional High Court EON TECHNOLOGY P. LIMITED [2011 (11) TMI 20 - DELHI HIGH COURT] wherein it has been held that when a non-resident agent operates outside the country no part of his income arises in India and since payment is remitted directly abroad and merely because an entry in the books of accounts of the assessee is made, it did not mean that non-resident has received any payment in India. Therefore, no business connection is established and income tax was not deductible at source and hence no disallowance is called for. We direct learned assessing officer to delete the disallowance on account of commission paid to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion of the coordinate bench in case of Lufthansa cargo India private limited versus DIT and also various other decisions. He further referred to the withdrawal of circular number 23 dated 23 July 1969, circular number 163 dated 29 May 1975 and circular number 786 dated 7 February 2000 and therefore according to him tax should have been deducted by the assessee at source on such foreign commission payment. He further relied upon the decision of authority for advance ruling in case of SKF Boilers and dryers private limited wherein it has been held that withholding of tax is mandatory under section 195 of the income tax act on export commission paid to non-resident agents, since commission is deemed to accrue or arise in India. He further referred to the circular number 7/2009 and based on discussion made in the assessment order held that export commission paid to the parties situated in Afghanistan by the assessee has deemed to accrue or arise in India hence it attracts the provisions of section 195 of the act. Accordingly he disallowed ₹ 44140860 paid as export commission under section 40 (a) (i) of the act and added to the total income of the assessee. Consequently the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /- by way of commission paid to the following persons:- SI.No. Name of the Agent Amount of commission paid(ln Rs) 1 Mr. Atequallah 2,46,61,750 2 Mr. Amanullah 1,94,79,110 TOTAL 4,41,40,860 The Assessing Officer also noted that the appellant has not deducted tax at source on the payment of aforesaid commission. The Assessing Officer requested the appellant as to explain why the TDS was not deducted on the aforesaid payment of commission to the aforesaid persons u/s 195 of the I T Act and in the absence of any TDS, why the payment of aforesaid commission should not be disallowed u/s 40(a)(ia) of the I T Act. In reply, the appellant submitted before the Assessing Officer that the commission was paid on account of export sales and the impugned commission has been paid to the agents who happened to be nonresident/ foreign agent for services rendered by them outside India. Therefore, no income is deemed to accrue or ari ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ious provisions of Income Tax Act which are applicable have so been discussed by the Ld. A.O in the order are Section-195,4, 5 9 of Income Tax Act, 1961.The Section -195 of the Act has to be read along with charging Section-4,5 9 of the Act. Section 195 of the Act deals with the deduction of tax at source from the payments made to non-residents. The relevant extracts of section 195 of the Act are reproduced herein for the sake of ready reference:- Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest 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 In section 195(1), the crucial expression is 'any other sum chargeable under the provisions of this Act. It would, thus, mean that the person making payment to the non-resident would be liable to deduct tax, if the payment so made is chargeable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reated by the enactment which is essential in fixation of the charge under the Act. The relevant extracts of section 9 are reproduced herein for the sake of ready reference:- ( 1) The following incomes shall be deemed to accrue or arise in India:- ( i) all incomes 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 : 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 course of his business : Provided further that where such broker, general commission agent or any other agent works mainly or wholly on behalf of a non-resident (hereafter in this proviso referred to as the principal non-resident) or on behalf of such non-resident and other non-residents which are controlled by the principal non-resident o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ise in India. The commission amounts which were earned by the nonresident assessee for services rendered outside India cannot, therefore, be deemed to be incomes which have either accrued or arisen in India... Section 9(1 )(vii): Fees for technical services Explanation 2 to section 9 contains an inclusive definition of business connection but it applies only to a business activity carried out through a person acting on behalf of a non resident. That situation does not exist here. Now we also wish to invite your attention to the judgment of Supreme Court The Supreme Court in the case of Ishikawajima Harima Heavy Industries Limited Appeal (civil) 9 of 2007/ (SLP (Civil) No.5318 of 2005) held that in order to attract Section 195 of the Act the services rendered by the non resident should have been rendered in India and also should have been used in India. This twin tests has to be satisfied in order to attract Section 195 of the Act. After the decision of Ishikawajima Harima Heavy Industries Limited the Legislation amended the Explanation to Section 9(2) of the Act with retrospective effect. Despite this Amendment the Karnataka High Court in the case of Jindal Thermal Po ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cipient of the payment has to be nonresident (i.e. Foreign Agent in our case). So there is no denial to the fact that the appellant is the person as stated in limb a above and so as per Sec. 195(1) of I.T Act he is under obligation to deduct tax on payment made to non-resident provided the payment is chargeable to tax as laid in clause b .This explanation is only trying to clarify the person who is obliged to comply with sub sec (1) to make deduction there under. Thus the obligation to deduct tax shall extend to all persons, resident or non-resident, whether or not the non-resident person has - ( i) A resident or place of business connection in India; or ( ii) Any other presence in any manner whatsoever in India. In a way it is only to define clarify the opening words of sec195(1) which reads any person responsible for paying to non resident . So it is only defining the person responsible for paying to non-resident not the payee i.e. the non resident to whom the payment is being made. The explanation nowhere suggests anything about recipient of the payment i.e. non-resident foreign agent. More over it won t be out of context to mention *here that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar No. 7 of 22/10/2009 does not have any impact on non deduction of TDS to foreign agents. Similar view has been taken by same Bench in the case of Allied Nippon Ltd. Vs. Dy. Commissioner of Income Tax, Circle-1 (1), New Delhi. The Ld. A.O has further referred to the recent decision of Authority for Advance Ruling in the case of SKF Boilers Driers (P) Ltd. The main contention of AAR in holding the commission paid by SKF Boilers and Driers Pvt. Ltd. as income accruing in India has been that the place of accrual of income is to be determine with respect to time of his accrual. While it is true that the point of time when commission arises is the time when the export of goods takes place, the AAR in SKF Boilers Driers case erred in taking the view that even the situs of accrual of the income was the place from where the goods were exported. Under tax laws in India, it has been generally accepted that the place where the work is actually done is normally the situs of accrual of the income. For instance, in the case of salary income, the place of rendering of services is regarded as the place of accrual of income. The commission agent did not carry on any activity in India, an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the statutory agent can be treated as incomes accrued, arisen, or deemed to have accrued or arisen in India to the non resident assessees during the relevant year. This takes us to section 9 of the Act. It is urged that the commission amounts should be treated as incomes deemed to have accrued or arisen in India as they, according to the department, had either accrued or arisen through and from the business connection in India that existed between the non-resident assessees and the statutory agent. This contention overlooks the effect of cl. (a) of the Explanation to cl. (i) of s/s (1) of section 9 of the Act, which provides that in the case of a business of which all the operations are not carried out in India, the income of the business deemed under that clause to accrue or in India shall be only such part of the income as is reasonably attributable to the operations carried out in India. If all such operations are carried out in India, the entire income accruing there from shall be deemed to have accrued in India. If however, all the operations are not carried out in the taxable territories, the profits and gains of business deemed to accrue in India through and from busines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er. 5.1 In this appeal, the appellant has effectively contested the disallowance of ₹ 4,41,40,860/- claimed as expenditure on account of export commission to non-resident u/s 40(a)(ia) of the Income Tax Act. It is noted that during the relevant assessment year, the appellant has exported fabric and general merchandise to M/s Mujib Sahal Baba Khel, Sarya Sargur, Kabul, Afghanisthan through the Commission Agents namely Mr Atiquallah and Mr.Amanullah. The appellant had entered into an agreement with Mr Atiquallah and Mr.Amanullah to act as intermediary for overseas sales of the product belonging to the appellant. The intermediary or the commission agents used to remit the sale considerations to the appellant net of commission. The Assessing Officer has observed in her order that the identity of the non resident commission agents are not clear in this case. However, it is noted that the aforesaid commission agents have given their complete addresses along with the copies of their passport wherein it has been recorded that they are the resident of Afghanistan. No material has been brought on record by the Assessing Officer to show that these persons are either nonexistent or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 5(2) of the Act. 5.3 Section 195 of the Income-Tax Act, 1961 reads as follows ( 1) Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest 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 : Explanation.-For the purposes of this section, where any interest or other sum as aforesaid is credited to any account, whether called Interest payable account or Suspense account or by any other name, in the books of account of the person liable to pay such income such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly. ( 2) Where the person responsible for paying any such sum chargeable under this Act (other than salary) to a non-resident considers that the whole of such sum would not be income chargeable in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or ( b) income which accrues or arises or is deemed to accrue or arise in India during such year. Section 5(2), the charging section for taxing non resident income provides for two conditions. First condition of receipt of income in India is ruled out in this case of the appellant, as the non resident agents have not received the commission in India, so it cannot be said that they have received any income in India .However the second condition viz., income accrues or arisen or deemed to accrue or arise requires further elaboration. Further, Section 7 of the Income Tax Act lists the income which is deemed to be received in India and this does not include commission income. Therefore, it can also not be said that the impugned commission income has accrued or arisen to the Non Resident agents in India.The aforesaid commission payment may, however, be deemed to accrue or arise in India under - ( i) section 9(1 )(i) of the Act if the commission agent has a business connection in India and the income arises through such 'business connection or ( ii) section 9(1 )(vii) of the Act if the services rendered by the commission agent could be characterized as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re were no terms corresponding to the term extracted above which was found in the agreements between the assessee and the Japanese company in Raghava Reddi's case [1962] 44 ITR 720 (SC). It cannot be said that the making of the book entries in the books of the statutory agent amounted to receipt by the assessees who were nonresidents as the amounts so credited in their favour were not at their disposal or control. It is not possible to hold that the non-resident assessees in this case either received or can be deemed to have received the sums in question when their accounts with the statutory agent were credited, since a credit balance, without more, only represents a debt and a mere book entry in the debtor's own books does not constitute payment which will secure discharge from the debt. They cannot, therefore, be charged to tax on the basis of receipt of income actual or constructive in the taxable territories during the relevant accounting period. The second aspect of the same question is whether the commission amounts credited in the books of the statutory agent can be treated as incomes accrued, arisen, or deemed to have accrued or arisen in India to the non-resident ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reasons, the appeals fail and are hereby dismissed with costs . The Hon ble Delhi High Court in CIT v. EON Technology (P) Ltd (supra), following the decision of the Apex Court in Toshuku (supra), held that export commission earned by the non-residents for services rendered outside India could not be deemed to be income which had either accrued or arisen in India in terms of section 9(1 )(i) of the IT Act. Further, in the case of Spahi Projects P. Limited.,315 ITR 374 (AARj, the Authority for Advance Rulings ( AAR ), after considering the provisions of section 9(1 )(i) of the Act, held that commission paid to an agent in South Africa for distribution of the products of the applicant in South Africa was not chargeable to tax in India. On similar facts, In an another case namely Ind Telesoft P. Ltd, IN RE (543 of 2001),the AAR held that for payment of commission thereon to non-resident companies for securing business outside India, there is no liability to deduct tax at source under the Indian Income Tax 1961. It has been likewise held in the following decisions - i. DCIT vs. Angelique International Ltd. [(2013) 55 SOT 226 (Delhi)] (confirmed by the Hon ble Delhi Hig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovisions of section 195 has no application. In order to invoke the provisions of section 195 of the Act, the income should be chargeable to tax in India. Here the commission payments to non-residents are not chargeable to tax in India and therefore the provisions of section 195 are not applicable. In the circumstances, we sustain the order of the Commissioner of Income Tax (Appeals) in deleting the disallowance made under 40(a)(i) of the Act. iv. ACIT vs. T. Abdul Wahid co (2014) 46Taxmann.com,(Chennai ) wherein it was held that Agency/sales commission payment to Non resident agents for services outside India is not tax deductable at source and outside the purview of section 40(a)(ia). v. AIA Engineering Ltd. vs. Addl. CIT (2012) 50 SOT 134 (Ahmedabad) vi. ACIT vs. Modern Insulator Ltd. [ (2011) 140 TTJ (JP) 715 vii. ACIT v. Nidhi Exports: ITA No. 626/Del./2012. viii. ACIT v. M/s Ram Gopal Sons: 2012 (7) TMI 479 ix. ACIT v. Avon Organics Ltd.: 2012 (12) TMI 691 x. CIT vs Model Exims (2013) 358 ITR 0072 (All.) Thus, on the basis of the aforesaid decisions, the legal position which emerges is that income earned by a nonresident f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ness connection in India, therefore, their income from commission cannot be deemed to be income accruing or arising in India for the purposes of section 9(1 )(i) of the Act. 5.5 The Assessing Officer has also relied upon the decision of Hon'ble ITAT, Delhi, in the case of Lufthansa Cargo India Pvt Ltd. vs DCIT (2005) 274 ITR 20 in support of her contention. However, it is noted that the aforesaid ratio of decision has been based on the different facts and circumstances from the case of the appellant. The aforesaid decision as rendered in respect of section 9(1 )(vii)(B) read with section 201(1 A) of the Income Tax Act. Moreover the aforesaid decision was rendered in the favour of the assessee and not in the favour of revenue. Therefore, in my opinion, the aforesaid ratio of decision in the case of Lufthansa Cargo India Pvt Ltd. (supra) is not applicable to the facts of the case of the appellant. 5.6 The A.O. has further mentioned in the assessment order that since, CBDT has withdrawn its Circular No. 23 and 786, therefore the commission remitted to non- resident to foreign agents become chargeable to tax in India. In this regard it is observed that the circulars issued by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paid to non-resident agents is not liable to tax under the provisions of I.T. Act when the services were rendered outside India, services were used outside India, payments were made outside India and there was no permanent establishment or business connection in India. It cannot be accepted that by virtue of CBDT Circular No.23/1969, the commission paid to non-resident agents become not liable to income-tax in India and on such withdrawal of Circular by the CBDT, such commission paid to non-resident agents become liable to income-tax in India. Irrespective of Circular issued by CBDT, the question of taxability of such commission to income tax has to be decided as per the provisions of section 9(1) of the Act. I am of considered view that the provisions of sec. 9(1) are not applicable to the commission paid to such non-resident agents. Such income (commission) in the hands of non-resident commission agents did not accrue or arise directly or indirectly, through or from any business connection in India. Such income to the non- resident commission agents did not accrue or arise in India through or from any property in India or through the transfer of capital asset situated in India. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o be decided as per the provisions of section 9(1) of the Act. I am of considered view that the provisions of sec. 9(1) are not applicable to the commission paid to such nonresident agents. Such income (commission) in the hands of nonresident commission agents did not accrue or arise directly or indirectly, through or from any business connection in India. Such income to the non- resident commission agents did not accrue or arise in India through or from any property in India or through the transfer of capital asset situated in India, In the facts and circumstances the provisions of sec. 9(1) were not applicable to such payment of commission by appellant to non resident agents. In a recent decision dated 23.05.2014, in the case of ACIT vs Rapid Pack Engineering Pvt Ltd., the Hon'ble ITAT, Mumbai, has considered the withdrawal of circular No 786 by the Circular No 7 of 2009 dated 22.10.2009, and held that the Circular No. 7 of 2009 did not have retrospective effect, even otherwise at the time of remittance of the amount in question, circular No. 786 was very much in force and existence, and the assessee cannot be expected to deduct tax at source on the commission paid to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out in India. It may be noted that for invoking Section 9(1 )(i), existence of business connection (Permanent Establishment) is a sine qua non and inevitable. It also appears that in the aforesaid ruling, the earlier ruling of the AAR in the case of Spahi Projects (supra) has not been considered and therefore it cannot be said to be per incuriam. Further, in this case, the decision of the Hon ble apex Court in the case of Toshuku (supra) has also been not considered. Therefore, the finding of the AO that right to receive commission arises in India when the order is executed by the person resident in India is, in my view, not correct since the mere fact that payment is made by a person resident in India or the order is executed by a person resident in India does not result in establishment of business connection of the nonresident payee. It is also observed that the SKF Boilers ruling was decided ex-parte, without any representation from the side of the assessee and, therefore, the binding precedents, it appears, were not noticed/ considered by the AAR. It is further noticed that the rulircg of the AAR in SKF Boilers is based on the ruling in the case of Rajiv Malhotra, [(2006) 284 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The judgment of Hon ble Delhi High Court is subsequent to the judgment in the case of Rajiv.Malhotra (AAR). Further the judgement of jurisdictional High Court has binding force. 5.8 On the basis of above mentioned facts and circumstances of the case, I am of the considered opinion that Commission payments to non-resident commission agents for export by the appellant does not represent income which is chargeable to tax under section 195 of the I.T act 1961 when analyzed under the framework of provisions of the Indian I.T Act. Hence, in my view, tax deduction at source was not required for said commission payments to non-resident agents and hence this expenses could not be disallowed u/s 40(a)(ia) of the Income Tax Act, 1961 .Therefore, the AO is directed to delete the impugned addition of ₹ 4,41,40,860/-. 7. In the present case, the commission is paid to the two parties for export sales. The foreign agents are non-resident and the services have been rendered undisputedly by them outside India. The commission payment was also supported by the copy of the agreement and confirmation of commission paid. The copy of the passport of the commission agents were also ..... X X X X Extracts X X X X X X X X Extracts X X X X
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