TMI Blog2017 (9) TMI 1794X X X X Extracts X X X X X X X X Extracts X X X X ..... changes holding their withdrawal. Thus, in respect of cases, which directly follow with the situations covered by the circulars, the liability to tax should continue to be in accordance with section 9 of the Act and its intent. The relevant sections, namely section 5(2) and section 9 of the Income-tax Act, 1961 not having undergone any change in this regard, the clarification in Circular No. 23 still prevails even after the withdrawal. No tax is therefore deductible under section 195 and consequently, the expenditure on export commission payable to a non-resident for services rendered outside India is not liable for withholding tax. In the case of the assessee, the applied section is Section 9(1)(i) of the Act. Therefore, the above Explanation to section 9(2) is not applicable, since it does not talk of clause (i) of sub-section (1) of section 9 of the Act. Therefore, the decisions rendered in cases relevant to clauses other than clause (i) of Sub-section (1) of section 9 of the Act are not relevant to the present case. Otherwise too, as considered hereinabove, it has been held that the non-resident did not have any business connection in India and there was no liability to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 27/- was made towards the assessee's income; that while making the said addition, the AO took a view that CBDT has issued Circular No.7 dated 22.10.2009 by which earlier circular No.23 dated 23 July 1969, along with Circular No. 163 dated 29th May 1975 and Circular No. 786 dated 7th February 2000 which were based on Circular No. 23, have been withdrawn; that the Circular No. 23 was issued in the context of Section 9 of the Income Tax Act which deems certain income to accrue or arise in India for non-residents; that thus, according to the AO, the assessee should have deducted tax at source; that the AO further held that post withdrawal of Circular No.786 the income arising to foreign agents on account of export commission falls u/s 5(2)(b) of the Act as the income had accrued in India when the right to receive the income became vested; that as per the AO, the position had entirely changed post 22.10.2009 i.e. after the withdrawal of Circular No. 786 and other relevant Circulars by the CBDT; that to further strengthen his view the AO referred to a Ruling by the Authority for Advance Ruling in the case of S.K.F. Boilers Driers (P.) Limited in which case, it was held that withhol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its reply are not applicable, as the position is entirely changed w.e.f 22.10.2009 i.e. after withdrawal of Circular No. 786 and other relevant circulars issued by the CBDT. Assessee has paid commission amounting to ₹ 1,09,48,085/- to a non-resident which is not in dispute. The assessee has not deducted TDS on such payments is also a fact. Further, the assessee has argued that foreign agents are not resident in India and they have not permanent establishment in India too. The assessee has not argued that foreign agents are availing the benefit of tax treaty. Complete details and particulars in respect of double taxation relief have been furnished with documentary evidence, therefore, no benefit in respect of DTAA is considered at this stage. Considering the totality of the case I hold that provisions of section 195 of the Act are clearly applicable in this case, therefore, commission paid/payable w.e.f 22.10.2009 to 31.03.2010, amounting to ₹ 63,08,727/- is disallowed u/s 40(a)(i) of the I.T. Act and added to the income of the assessee. 4. By virtue of the impugned order, the ld. CIT(A) allowed the assessee's appeal. 5. The ld. DR has contended that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om AO's action, it may be mentioned here that the AO has subjected the payment of commission to TDS provisions only after the cut off date of 22.09.2009, the date on which the Circular No. 7 of 2009 got operational, meaning thereby he has disallowed payments of commission for the period 22.09.2009 to 32.03.2010 (sic), and for the period prior to it he has allowed the appellant's claim in respect of payments made before the said date and has thus accepted appellant's claim of such payments considering the same to be complying to the section 5(2) and section 9 of the Act. Therefore, while considering so, I find that the issue as emerging and requiring adjudication therefore is whether the appellant is liable to deduct tax at source (TDS) on the payments made to non-resident agent(s) in a situation which is subsequent to the withdrawal of the said circular and whether the disallowance made in respect of the payment made to foreign commission agents amounting to ₹ 63,08,727/- u/s 40(a)(i) in view of provisions of section 195 of the Act is called for or not. Further, two important aspects that need further elucidation in the appellant's case i.e. whether there exis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ke up the issue whether the payment of commission to overseas agents with out deduction of tax is attracted disallowance under section 40(a)(ia) of the Act or not. We find that the CBDT by its recent Circular No.7 dated 22nd October, 2009 withdrawn its earlier Circular Nos. 23 dated 23-7-2009, 163 dated 29th May, 1975 and 786 dated 7-2-2000. The earlier circulars issued by the CBDT have clearly demonstrated the illustrations to explain that such commission payments can be paid without deduction of tax. Thus, the main thrust in such a situation is whether the commission made to overseas agents, who are non-resident entities, and who render services only at such particular place, is assessable to tax. Section 195 of the Act very clearly speaks that unless the income is liable to be taxed in India, there is no obligation to deduct tax. Now, in order to determine whether the income could be deemed to be accrued or arisen in India, section 9 of the Act is the basis. This section, in our opinion, does not provide scope for taxing such payment because the basic criteria provided in the section is about genesis or accruing or arising in India, by virtue of connection with the property in I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 's Laboratories Ltd. (supra), wherein the Hon'ble ITAT Hyderabad has duly interpreted the import and impact of the withdrawal of the circular, it is therefore observed that the said decision is squarely covering the issue as involved in the present appeal, and on the basis of the same it is further observed that post withdrawal of the CBDT Circular, the provisions of section 5(2) and section 9 has not undergone any change. 12. However, before proceeding further, it may be worthwhile to refer to the provisions of sec. 9(1)(i) of the Act, and to see that commission payments could be subject to tax by the AO or not. The AO in order to bring said commission payments within the ambit of TDS provisions has invoked Section 9(1)(i) of the Act. The relevant extract of section 9(1)(i) is reproduced hereunder : 9.(1) The following incomes shall be deemed to accrue or arise in India:- (i) all income 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. [Explanation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -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 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 or have a controlling interest in the principal non-resident or are subject to the same common control as the principal non-resident, he shall not be deemed to be a broker, general commission agent or an agent of an independent status . 12.2 As regards the import of section 9(l)(i) of the Act in terms of business connection, the Hon'ble Delhi High Court in the case of CIT v. EON Technology (P.) Ltd. reported at 343 ITR 366 while dealing with payment of commission by the said assessee company to its parent company i.e. ETUK of UK whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to pursue the payments to be made by the purchasers as located abroad. Further, as observed earlier also, the AO has not been able to dwell further beyond just mentioning and invoking the provisions just of section 9(1)(i), whereas unless and until the vital ingredients like permanent establishment or business connection are established by the AO, the mere reference and invoking the provisions of sections 5(2)(b) or section 9(1)(i) may not suffice to make such a disallowance. 14. The judicial decisions that have evolved has further clarified the issue in its correct perspective, notable mention out of which may be made of the decision of the Hon'ble Apex Court as rendered in the case of C.I.T. v. Toshoku Limited, reported at 125 ITR 525 (SC), wherein the Hon'ble Apex Court while dealing with the twin aspects of the situation in the case of the assessee before it, as to what was the effect of the entries in the books of account of the Indian assessee which had resulted in debit and credit entries on account of commission and secondly, whether procurement of export orders by the foreign companies for the Indian company had resulted in a business connection, has opined as u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or arisen in India to the non-resident assessees during the relevant year. This takes us to s. 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 sub-s. (1) of s. 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 arise 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 therefrom 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 business connection in India shall be only such profits and gains as are reasonably attributable to tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oing, it is thus found that the provision of section 9(l)(i) are not applicable in the appellant's case. 16. As far as the AO's reliance in the AAR's decision in SKF Boilers is considered, with respect, it is observed that the same is not found to be applicable as the said ruling was in respect of an entity based in Pakistan with which India did not have any treaty or DTAA. Whereas in the present appeal where the appellant has made its submission with regard to the treat provisions as existing vide the DTAAs entered into by India with the countries i.e Italy, USA and UK wherein the commission agents reside, I find that while the essential feature of the commission payments being made on commercial or business terms, therefore, per force of the relevant covenant/Articles of such treaties, no adverse inference can be drawn so as to deny the appellant's claim under the treaty provisions. More so there is another ruling given by the Hon'ble AAR in Spahi Projects Pvt. Ltd. dated 29.07.2009 in AAR No. 802 of 2009 which has not been considered by the AO, and the same is directly on the issue of commission payments to foreign agents and is found to be squarely applic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Circular No. 7 of 2009 by CBDT by which the earlier circulars were withdrawn, will make any difference as to bringing the commission payments within the ambit of tax as he has not adverted to the admitted position that there exists no business connection or permanent establishment of such agents in India. Rather, per the force of judicial decisions notably as rendered by the Hon'ble Apex Court in Toshoku Ltd. (supra) and the Hon'ble Madras High Court in the case of Faizan Shoes and by Hon'ble ITAT Hyderabad in the case of Divi's Laboratories Ltd. (supra) it is duly shown that without the existence of business connection or permanent establishment, and/or with the withdrawal of circular, the provision of section 9(l)(i) or section 5(2) have not undergone any change, as a result of which the commission income of these agents does not get taxable in India. Therefore, due to the non-existence of any permanent establishment or any business connection which is indeed a pre-requisite for holding that the income does accrue or arise in India, and on that basis without correctly invoking the provisions of section 5(2) or 9(l)(i) of the Act, the appellant cannot be asked t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erefore held to be not taxable in India; that the withdrawal of the Circular Nos. 23 and 786 has been made on 22.10.2009 vide CBDT Circular No. 7 of 2009 and mere withdrawal of the circular does not negate the principles of income deemed to accrue or arise in India or outside India; that the CBDT has not stated that any part of the circulars is contrary to law or that the circulars were wrongly issued or that the law has undergone changes holding their withdrawal; that thus, in respect of cases, which directly follow with the situations covered by the circulars, the liability to tax should continue to be in accordance with section 9 of the Act and its intent; that the relevant sections, namely section 5(2) and section 9 of the Income-tax Act, 1961 not having undergone any change in this regard, the clarification in Circular No. 23 still prevails even after the withdrawal; and that no tax is, therefore, deductible under section 195 and consequently, the expenditure on export commission payable to a non-resident for services rendered outside India is not liable for withholding tax. 12. The assessee relied on Ge India Technology Centre (P.) Ltd. (supra) wherein it has been held tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olicited orders, but the right to receive commission arises in India when the order is executed by the commission agent in India; and that the agents have rendered services abroad in the form of soliciting the orders and the commission is remitted to them abroad in lieu of services rendered for execution of business orders in India. 16. It remains undisputed that in respect of payment made to non-resident agents, no TDS has been deducted as these agents have procured export orders for the assessee firm and assisted in the timely realization of the payments; that the commission is declared in the GR issued by the assessee for the purpose of export of goods; that the same is within the limits prescribed by Reserve Bank of India and all remittances have been made through proper banking channels; that the non-resident agent has carried out all his activities outside India, did not render any service in India and did not have Permanent Establishment (PE) in India; that residing in the foreign countries with whom India has entered into a DTAA and under the Article 7 of the said DTAA, the income received is being taxed in their hands in their country; that the assessee has remitted pay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate in India. [Explanation 1]. For the purposes of this clause - (c) in the case of a business of which all the operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India; (d) in the case of a non-resident, no income shall be deemed to accrue or arise in India to him through or from operations which are confined to the purchase of goods in India for the purpose of export; ** ** ** [(c) in the case of a non-resident, being a person engaged in the business of running a news agency or of publishing newspapers, magazines or journals, no income shall be deemed to accrue or arise in India to him through or from activities which are confined to the collection of news and views in India for transmission out of India;] [(d) in the case of a non-resident, being- (1) an individual w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tish parent/holding company ETUK could not said to have been accrued to ETUK in India and therefore, the assessee was not liable to deduct tax at source from payment of commission to ETUK . The head note of order is reproduced hereunder: Section 9 of the Income-tax Act, 1961 - Income - Deemed to accrue or arise in India Assessment year 2007-08 - Assessee-company was engaged in business of development and export of software - During relevant assessment year, it had paid commission to its British parent/holding company ETUK on sales and amounts realized on export contracts procured by ETUK for assessee - Assessing Officer held that commission income earned by ETUK had accrued in India or was deemed to accrue in India and, therefore, assessee was liable to deduct tax at source there from and as there was failure, said expenditure should be disallowed under section 40(a)(ia) - Whether when ETUK was not rendering any service or performing any activity in India itself, commission income could be said to have accrued, arisen to or received by ETUK in India merely because it was recorded in books of assessee in India or was paid by assessee situated in India - Held, no - Whether for ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (l)(i) of the Act. The commission amounts which were earned by the non-resident assessees for services rendered outside India cannot, therefore, be deemed to be incomes which have either accrued or arisen in India. The High Court was, therefore, right in answering the question against the department. 22. In Dy. CIT v. Divi's Laboratories Ltd. [2011] 12 taxmann.com 103/131 ITD 271 (Hyd.), it was held that the CBDT by its Circular No. 7 dated 22.10.2009 had withdrawn its earlier Circular Nos. 23 dated 23.07.2009, 163 dated 29.05.1975 and 786 dated 07.02.2000; that the earlier Circulars issued had clearly demonstrated the illustration to explain that such commission should be paid without deduction of tax; that thus, the main thrust, in such situation, is whether the commissioner paid to overseas agents, who are non-resident entities and who render services only at such particular place, is assessable to tax; that section 195 very clearly speaks that unless the income is liable to be taxed in India, there is no obligation to deduct tax; that in order to determine whether the income can be deemed to be accrued or arisen in India, section 9 is the basis; that this section does n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was justified in directing the Assessing Officer to delete the said addition; and that after considering the totality of facts and the circumstances of the case, the order of the ld. CIT(A) on this issue was not to be interfered with and, accordingly, the same was to be upheld. 23. In Faizan Shoes (P.) Ltd. (supra), wherein also there was a similar issue of export commission being paid by a shoe manufacturer outside the India without deducting TDS thereon, the Hon'ble High Court has held as under : 10. While dealing with Section 9(1) of the Act, the Supreme Court in CIT v. Toshoku Ltd. [1980] 125 ITR 525 (SC), on considering a transaction where tobacco was exported to Japan and France and sold through non-resident assessees who were paid commission, held as under: 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 assessees during the relevant year. This takes us to s. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... port orders and paid commission. That apart, the Commissioner of Income (Appeals) as well as the Tribunal have correctly applied the principle laid down in GE India Technology Cen. (P.) Ltd. case, referred supra, to hold that the assessee is not liable to deduct tax at source when the non-resident agent provides services outside India on payment of commission . 24. Regarding AO's reliance on SKF Boilers it is observed that the same is not found to be applicable as the said ruling was in respect of an entity based in Pakistan with which India did not have any treaty or DTAA, whereas in the present appeal, the assessee has made its submission with regard to the treat provisions as existing vide the DTAAs entered into by India with the countries i.e. Italy, USA and UK wherein the commission agents reside. 25. The decision of the Authority for Advance Rulings in the case of SKF Boilers Driers (P.) Ltd. (supra) has considered its earlier decision in the case of Rajiv Malhotra, In re [2006] 155 Taxman 101/284 ITR 564 (AAR) and the decision in the case of Spahi Projects (P.) Ltd. (supra) dated 29.07.2009 in AAR No. 802 of 2009 has not been considered and hence the reliance on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntinue to be in accordance with section 9 of the Act and its intent. The relevant sections, namely section 5(2) and section 9 of the Income-tax Act, 1961 not having undergone any change in this regard, the clarification in Circular No. 23 still prevails even after the withdrawal. No tax is therefore deductible under section 195 and consequently, the expenditure on export commission payable to a non-resident for services rendered outside India is not liable for withholding tax. 29. It is seen that the ld. CIT(A) has duly taken into consideration the above facts and circumstances besides the case laws. 30. Then, also for A.Y. 2011-12, a similar disallowance was made, which was deleted (APB 76-86) by the CIT(A) and the department did not file any appeal against the CIT(A)'s order. 31. Apropos, Circulars of CBDT, in Kerala Finance Corpn. v. CIT [1994] 75 Taxman 573/210 ITR 129 (SC), the Apex Court has stated that the circular issued by CBDT under section 119 of the Act cannot override or detract the provisions of the Act. Thus, the withdrawal of circular does not affect the settled position that export commission is not taxable in India as services are rendered outside Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sue and held that sales commission paid by assessee is not chargeable to tax in India as the services were rendered outside India by non-residents and therefore, provisions of section 195 have no application so as to disallow commission payments under section 40(a)(i) of the Act. While holding so, the Commissioner of Income Tax (Appeals) considered various decisions on the issue including the decision of Hon'ble Supreme Court in the case of GE India Technology Centre (P.) Ltd. (supra). The Commissioner of Income Tax (Appeals) in one of the case before us in K.H. Arind Pvt. Ltd. following the decision of the co-ordinate Bench of this Tribunal in the case of Farida Shoes (P.) Ltd. (supra) deleted the disallowance observing as under:- ** ** ** 6. Similar issue has been considered by this Tribunal in the case of ITO v. Faizan Shoes (P.) Ltd. (2013 34 taxmann.com 79 (Chennai) wherein the co-ordinate bench of this Tribunal, to which one of us is a party, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the non-resident was to be treated as fees for technical services covered under the provisions of section 9(1)(vii) : (i) Asstt. CIT v. Evolv Clothing Co. (P.) Ltd. [2013] 33 taxmann.com 309/142 ITD 618 (Chennai - Trib.) (ii) Ashapura Minichem Ltd. v. Asstt. DIT (International Taxation) [2010] 40 SOT 220 (Mum.) (iii) Rajiv Malhotra, (supra) (iv) GVK Industries Ltd. v. ITO [2015] 54 taxmann.com 347/231 Taxman 18/371 ITR 453 (SC) (v) GVK Industries Ltd. v. ITO [1998] 96 Taxman 179/228 ITR 564 (AP) (vi) Shell India Markets (P.) Ltd., In re [2012] 18 taxmann.com 46/205 Taxman 288/342 ITR 223 (AAR - New Delhi) (vii) ONGC Videsh Ltd. v. ITO [2013] 31 taxmann.com 119/141 ITD 556 (Delhi - Trib.) (viii) Pr. CIT v. Madhyanchal Vidyut Vitran Nigam Ltd. [IT Appeal No. 86 of 2015] (ix) Bosch Ltd. v. ITO [2012] 28 taxmann.com 228/141 ITD 38 (Bang. - Trib.) (x) Sintex Industries Ltd. v. Asstt. DIT [2013] 30 taxmann.com 290/141 ITD 98 (Ahd. - Trib.) 36. In the assessee's case, however, as seen hereinabove, the relevant provisions sought to be attracted by the AO is section 9(1)(i). That being the case, none of these cases, is applicable to the present one. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rue or arise in India under clause (v) or clause (vi) or clause (vii) of sub-section (1) and shall be included in the total income of the non-resident, whether or not,- (i) The non-resident has a residence or place of business or business connection in India; or (ii) the non-resident has rendered services in India. 40. In the case of the assessee, the applied section is Section 9(1)(i) of the Act. Therefore, the above Explanation to section 9(2) is not applicable, since it does not talk of clause (i) of sub-section (1) of section 9 of the Act. Therefore, the decisions rendered in cases relevant to clauses other than clause (i) of Sub-section (1) of section 9 of the Act are not relevant to the present case. Otherwise too, as considered hereinabove, it has been held that the non-resident did not have any business connection in India and there was no liability to withhold tax u/s 195 of the Act. Moreover, the Assessing Officer has himself accepted that payments made prior to withdrawal of the Circular do not call for any disallowance u/s 40(a)(i) of the Act. 41. In view of the above, the order of the ld. CIT(A) is found to be well reasoned. The department has not been ..... X X X X Extracts X X X X X X X X Extracts X X X X
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