TMI Blog2020 (11) TMI 479X X X X Extracts X X X X X X X X Extracts X X X X ..... he non-resident agents and accordingly, the provisions of section 195(2) of the Act would not come into operation at all. Reliance in this regard had been rightly placed by the Ld. CIT(A) on the decision of Hon ble Apex Court in the case of GE Technology Center Pvt.Ltd. [ 2010 (9) TMI 7 - SUPREME COURT ] wherein held The parties merely source the prospective buyers for effecting sales by the assessee, and is analogous to a land or a house / real estate agent / broker, who will be involved in merely identifying the right property for the prospective buyer / seller and once he completes the deal, he gets the commission. Thus, by no stretch of imagination, it cannot be said that the transaction partakes the character of fees for technical services as explained in the context of Section 9(1)(vii) of the Act. As the non-residents were not providing any technical services to the assessee, as held above and as held by the Commissioner of Income Tax (Appeals), the commission payment made to them does not fall into the category of fees of technical services and therefore, explanation (2) to Section 9(1)(vii) of the Act, as invoked by the Assessing Officer, has no application to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the lead case and the decision rendered thereon would apply with equal force for AY 2014-15 also, except with variance in figures. 3. The first identical issue to be decided in this appeal is as to whether the Ld.CIT(A) was justified in deleting the disallowance made u/s 40(a)(i) of the Act in the sum of ₹ 4,18,50,792/- u/s 195 of the Act in the facts and circumstances of the case. 4. We have heard the rival submissions and perused the materials available on record. We find that assessee is engaged in the business of trading activity of import and export of pharmaceutical ingredients, chemicals and intermediates. We find that the assessee debited a sum of ₹ 4,18,50,792/- in its profit and loss account towards export commission paid to overseas agents, who arrange for exports and procure export orders for the assesse. The assessee pleaded that these overseas agents are not having any permanent establishment (PE) in India and are residents of the respective foreign countries. The Ld. AO did not heed to this contention of the assessee and proceeded to invoke the provisions of Sec. 40(a)(i) r.w.s 195 of the Act stating that the said payment required to be subjected t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hon ble le Delhi High Court in the case of CIT vs Angelique international limited reported in 359 ITR 9 (delhi) (d) Decision of Hon ble Rajasthan High Court in the case of CIT vs Modern Insulators Ltd reported in 369 ITR 138 (e) Decision of Hon ble Madras High Court in the case of CIT vs Orient express reported in 330 taxmann.com 602 (f) Decision of Hon ble Madras High Court in the case of CIT vs Farida Leather company reported in 238 taxmann.com 473 (g) Decision of co-ordinate bench of this Tribunal in the case of ACIT vs Pahilajarai Jaikishan reprted in 157 ITD 1187 (Mum Trib.) 6. It is not in dispute that the non-resident agents to whom commission was paid by the assessee have rendered services outside India for sale of the goods of the assessee outside India. It is not in dispute that the said non-resident agents do not have any PE in India and that they are domiciled in U.K and USA. In view of these facts, it could be safely concluded that there is no income chargeable to tax in India in terms of section 195(1) of the Act in the hands of the non-resident agents and accordingly, the provisions of section 195(2) of the Act would not come into operation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the year end. The assessee had submitted details of said payments for last three years as under:- Financial Year Overseas Transaction Value (in Rs . ) Overseas Commission Value (in Rs . ) %age of Overseas Commission 2008-09 12,23,22,188.00 1,68,19,755.00 13. 75% 2009-10 16,93,05,845.00 1,05,30,824.00 6.22% 2010-11 6,00,73,432.00 12,01,469.00 2%. The assessee had duly submitted copies of agency agreement/contract and exclusivity agreement pertaining to 4 major overseas agents based in USA Europe as well copies of ledger account of these agents. The four foreign agents to whom aforesaid payment of commission of ₹ 1.68 crore were made are as under: Sr. No. Name of the company Name of the country 1 Regal Rank Ltd UK ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eir policy do not give them commission. The assessee submitted that these commission or agency charges includes expenses incurred by the overseas agents which included registration , vendor approval, quality approval, technical documentation, local analysis etc., which is maximum in the first year as all the registration and formalities have to be undertaken. It was submitted that prices or value generated is also on higher side in the first year in order to cover up the expenses mentioned above. The assessee submitted that these commission or agency charges also included out of pocket expenses which is the responsibility of the overseas agents to be incurred by them. It was also submitted that these overseas commission were paid to overseas agents only after completion of registration and other formalities and achievement of sales target in terms of value and volume . The authorities below have perused the agency agreements. It is provided in the agreements that targets as to value and volumes are fixed for overseas agents to get commission and in case the performances are not forthcoming, the assessee will not be liable to pay these commissions. Thus, these commissions paid to ov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red to make an application to the AO for seeking permission for lower deduction of income-tax at source or for no deduction of income tax at source u/s 195 which was not done by the assessee. Admittedly , the assessee while making payments to these overseas agents towards commissions did not deducted income-tax at source under the provisions of Section 195 of the 1961 Act but it is a matter of record that the assessee did produce certified Form No. 15CA/15CB before AO during assessment proceedings wherein it is certified by CA that no sum so paid by assessee towards commission to these overseas agents is liable to be taxed under provisions of the 1961 Act. the Revenue could not controvert this position. It is important at this stage to refer to decision of Hon ble Madras High Court in the case of Evolv Clothing Company Private Limited v. ACIT reported in (2018) 407 ITR 72(Mad.), wherein it was held as under: 19. From the judgment and order of the learned Tribunal under appeal, it appears that the Revenue only contended that the payee in question had rendered technical services in the nature of systematic research to the appellant and received fee in lieu thereof, which was l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ident agent and/or a foreign agent for service provided outside India for procuring orders is taxable in India? (ii) Whether rendering of the service of market survey abroad would tantamount to rendering of technical service so as to attract taxes in India? (iii) Whether an assessee is liable to deduct TDS on commission paid to overseas agents operating abroad? (iv) Whether the amendment of the Income Tax Act with retrospective effect from 1.6.1976 by the Finance Act, 2010 clarifying that income of non resident would be deemed to accrue or arise in India under Clause (v) or clause (vi) or clause (vii) of sub-section(1) and 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 connection in India, and whether or not the nonresident has rendered services in India is attracted in the facts and circumstances of this case? 23. The first question necessarily and obviously has to be answered in favour of the appellant/assessee and against the Revenue, the question being covered by the judgment of Supreme Court in Toshoku Ltd., supra. The issue before the learned Tribunal was whether the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dment with retrospective effect from 1.6.1976 by insertion of Explanation to Section 9(2) can only apply to income by way of interest, by way of royalty and by way of fees for technical services and not to brokerage or job wise commission on activities incidental to procurement of orders. 27. The Assessing Officer, in effect, held that income could be deemed to accrue or arise in India under Section 9(1)(vii) of the IT Act even if the non-resident did not have place of business or business connection in India or had not rendered services in India. The exceptions provided under Section 9(1)(vi)(b)/9(1)(vii)(b) of the IT Act, which apply to utilization of services of business outside India, did not cover the assessee's case. 28. The Assessing Officer had also taken note of withdrawal of two circulars: (i) Circular No.786, dated 7.2.2000, dealing with payment of export commission, opining that withdrawal, being procedural in nature, would apply to proceedings pending; and (ii) Circular No.23 of 1969, which exhaustively dealt with subject of Non residents Income accruing or arising through or from business connection in India Liability to tax Section 9 of the Income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome would be said to arise or accrue in India. Therefore, as stated earlier, if the contention of the Department was accepted it would mean obliteration of the expression sum chargeable under the provisions of the Act from Section 195(1). 32. Where there is no liability in India, there can be no question of disallowance under Section 40(a)(i) or Section 40(a)(ia) of the IT Act on the ground of non-deduction of tax at source. Moreover, where a non-resident has no permanent establishment in India, there can be no liability either under the domestic law or under Double Taxation Avoidance Agreement. In any case, even if a non-resident Indian did have a permanent establishment, but income was earned without availing of such permanent establishment, the income for services rendered abroad could not have been liable for tax deduction at source. 33. Under Section 9(1)(vii)(b), income by way of fees for technical services payable by a person, who is a resident, is taxable income except where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . On a reading of Explanation (2) to Section 9(1)(vii), fees for technical services means consideration, including lumpsum consideration for rendering any managerial, technical or consultancy services. 38. In the instant case, the Assessing Officer has, in the assessment order, accepted that the appellant assessee has paid commission charges to overseas agents. It is not the case of the Assessing Officer that any lumpsum consideration has been made for any specific managerial, technical or consultancy services. 39. On a overall reading of the Explanation, it is apparent that fees for technical services does not contemplate commission which is order specific and computable at a small percentage of the order value. Section 40(a)(i) does not contemplate order wise commission based on the order value. 40. For the reasons discussed above, the appeal is allowed and the questions framed are answered in favour of the assessee against the Revenue. No costs. Consequently, connected miscellaneous petition is closed. The aforesaid is the decision of Hon ble Madras High Court in the case of Evolv Clothing Company Private Limited(supra) for AY 2009-10 wherein the Hon ble Madr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tead these payments were linked to the targets in terms of value and volume of export orders generated or imports facilitated by these overseas agents for the assessee.These overseas agents were not paid commission in India and payments were remitted abroad by assessee from India through banking channel and in case of two overseas agents it is stated that payments were not made by year end. Attention is also drawn to recent decision of Hon ble Gujarat High Court in the case of PCIT v. Ferromatic Milacron India Private Limited (2018) 99 taxmann.com 154(Guj.) , wherein Hon ble Gujarat High Court held that on payments made to overseas agents towards commission for export orders will not entail deduction of income-tax at source u/s 195 and no disallowance u/s 40(a)(i) is warranted by holding, as under: Revenue is in appeal against the judgment of the Income Tax Appellate Tribunal dated 19.04.2018 raising following questions for our consideration: A. Whether the Appellate Tribunal had erred in law and on facts in upholding the order of the CIT(A) deleting the addition made on account of disallowance u/s. 40(a)(ia) of the Act for non deduction of tax on commission payable to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rise. 4. As is well known, section 195 of the Act imposes requirement of deduction of tax at source on any person responsible for paying to a non-resident any sum chargeable under the provisions of the Act. The prime requirement therefore for applicability of the section is that the payment to the nonresident should be a sum chargeable under the provisions of the Act. In other words, the payment is not an income which is chargeable to tax in India. Requirement of deducting tax at source under section 195 of the Act would not arise. This aspect was elaborated by the Supreme Court in case of GE India Technology Center P. Ltd (supra) holding that on mere remittances of an amount to non-resident, duty to deduct tax at source would not arise unless such remittances contains wholly or partly taxable income. 5. Section 9 of the Act carries the heading income deemed to accrue or arise in India. Sub-section (1) of section 9 provides that in following incomes, contained in various clauses therein, shall be deemed to accrue or arise in India. Clause (i) of sub section (1) provides that all income accruing or arising, whether directly or indirectly, through or from any business conn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der Section 40 [a](ia) of the Income-tax Act, 1961. 3. Revenue carried the matter in appeal before the Tribunal. The Tribunal, by the impugned judgment, dismissed such appeal making the following observations : We have heard the rival contentions and perused the material on record carefully. Section 195 required that any person responsible for paying to a non resident any some chargeable to tax shall deduct tax there on at the rate in force. We noticed that assessee has paid commission to non-residents for services rendered in sales and marketing of assessee's product as commission agent outside India. We observe that the agents were notarized and not having fixed base in India and have rendered all the sales and marketing services outside India. We have also perused the judicial pronouncements of the Hon'ble Supreme Court in the case of GE India Technology CEN Private Limited v. CIT [2010]193 Taxman 234(SC), wherein, it was held that section 195 gets attracted in cases where payment made is a composite payment in which a certain proportion of payment has an element of income chargeable to tax in India and prayer seeks a determination of appropriate proportion of sum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... persons in any manner whatsoever in India. This expression which is added for removal of doubt is clear from the plain language thereof, may have a bearing while ascertaining whether certain payment made to a non-resident was taxable under the Act or not. However, once the conclusion is arrived that such payment did not entail tax liability of the payee under the Act, as held by the Supreme Court in the case of GE India Technology Centre (P.) Ltd. (Supra), sub-section [1] of Section 195 of the Act would not apply. The fundamental principle of deducting tax at source in connection with payment only, where the sum is chargeable to tax under the Act, still continues to hold the field. In the present case, the Revenue has not seven seriously contended that the payment to foreign commission agent was not taxable in India. 6. Tax Appeal is therefore dismissed. We have observed that the assessee has rightly relied on the decision of Hon ble Madars High Court in CIT v. Farida Leather Company in Tax Case Appeal No. 484 of 2015 , wherein Hon ble Madras High Court decided the appeal in favour of the taxpayer on the ground that even if the taxpayer has not applied for certificat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee to non-resident agents, for the services rendered by them, outside India, in procuring export orders for the assessee, would not attract or partake the character of fees for technical services as explained in the context of 9 (1) (vii) of the Act and therefore, there is no scope for the application of the provisions of Section 195 of the Act (Tax Deducted at Source). It is also contended that as the non-resident agents have neither business connection in India nor they have permanent establishment in India, they are liable to be taxed in India. 5.1 Yet another contention of the learned counsel for the assessee is that: (a) the assessee paid the amount by way of commission to foreign agents for the services rendered outside India; (b) the Tax Deduction at Source (TDS) is required to be made on all payments to non-residents, only if such payments are liable to be taxed in India. (c) following the decision of this Court, CIT v. Faizan Shoes (P.) Ltd. [2014] 367 ITR 155/226 Taxman 115/48 taxmann.com 48 (Mad.), the assessee is not liable to deduct tax at source, when the non-resident agent provides services outside India on payment of commission. 5.2 The contention of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year in which such tax has been paid. Provided further that where an assessee fails to deduct the whole or any part of the tax in accordance with the provisions of Chapter XVIIB on any such sum but is not deemed to be an assessee in default under the first proviso to sub-section (1) of section 201, then, for the purpose of this sub-clause, it shall be deemed that the assessee has deducted and paid the tax on such sum on the date of furnishing of return of income by the resident payee referred to in the said proviso.' (ii) Explanation 2 to Section 195(1) of the Act :- 'Section 195 - Other sums: (1) Any person responsible for paying to a non-resident not being a company, or to a foreign company, any interest (not being interest referred to in section 194LB or section 194LC) or section 194LD 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 : Provided that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 195(1) of the Act deals with deduction of tax from payment to non-residents and foreign companies. Section 195(1) of the Act comes into play at a stage where the payer, who is enjoined to deduct the tax, either credit such income to the account of the payee or make payment thereof, whether in cash / cheque / draft or any other mode. The taxability of such amount in the hands of the payee or occasioning of the taxable event is alien for the purpose of Section 195(1) of the Act. 7.4 Section 195(2) is an enabling provision, enabling an assessee to file an application before the Assessing Officer to determine the appropriate proportion of the sum chargeable and upon such determination, the tax has to be deducted under Section 195(1) of the Act. The payment is made credited to the account of the payee. 8. The question now is, whether the assessee ought to have deducted tax at source as contemplated under Section 195 of the Act, when the assessee paid commission to foreign agent. 9. This question has been answered by the Hon'ble Supreme Court, in the case of G.E.India Technology Centre (P.) Ltd. (supra), in which, it is very categorically held that the tax deducted a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e buyers for effecting sales by the assessee, and is analogous to a land or a house / real estate agent / broker, who will be involved in merely identifying the right property for the prospective buyer / seller and once he completes the deal, he gets the commission. Thus, by no stretch of imagination, it cannot be said that the transaction partakes the character of fees for technical services as explained in the context of Section 9(1)(vii) of the Act. 12. As the non-residents were not providing any technical services to the assessee, as held above and as held by the Commissioner of Income Tax (Appeals), the commission payment made to them does not fall into the category of fees of technical services and therefore, explanation (2) to Section 9(1)(vii) of the Act, as invoked by the Assessing Officer, has no application to the facts of the assessee's case. 13. In this case, the commission payments to the non resident agents are not taxable in India, as the agents are remaining outside, services are rendered abroad and payments are also made abroad. 14. The contention of the learned counsel for the Revenue is that the Tribunal ought not to have relied upon the d ..... X X X X Extracts X X X X X X X X Extracts X X X X
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