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TMI Blog2018 (5) TMI 2086X X X X Extracts X X X X X X X X Extracts X X X X ..... at source on payments for commission of sales exports arid legal and professional charges despite the fact that the assessee failed to deduct taxes at source u/s 195 of the I.T. Act on the payments made to non-residents without appreciating the fact that the income was accrued in-India and the assessee was under statutory obligation to deduct taxes at source. 4. Brief facts of the case are that the Assessing Officer has disallowed the amounts under section 40(a)(ia) as no TDS was deducted on the sales commission pertaining to exports paid to the parties operating abroad. The Assessing Officer held that even though the commission agents do not have any PE in India and the services were outside India and since the services were rendered for an Indian Company, TDS needs to be deducted. 5. During the hearing before us, the Ld. AR has argued based on the submissions made before the Ld. CIT(A). 6. The complete details of the arguments and the decision of the Ld. CIT(A) are as under: The appellant company had made payment to various parties for the above services. The expenses were incurred for services rendered outside India and the payments were made to parties who were outside In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s per circular No. 23 of year 1969: A foreign agent of India Exporter Operates in his home country and no part of his income arise in India. His commission is usually remitted directly to him outside India is not received by him in India. Therefore such an agent is not liable for tax on this commission in India. This view was reaffirmed by CBDT vide Circular No. 163 of the 1975. 4. As per Circular No. 786 of the year 2000. The deduction of tax at source under section 195 would arise if the payment of commission to the non-resident agent is chargeable to tax in India. In this regard attention to CBDT Circular No. 23 dated 23-07-1969 is drawn, where the taxability of* Foreign Agent of India Exporters. Was. considered along with certain other specific situations. It had been clarified then that where the non-resident agent operates outside the country. No part of his income arises in India. Further, since the payment is usually remitted directly abroad it cannot be held to have been received by or on behalf of the agent in India. Such payments were therefore held to be not taxable in India. The relevant sections, namely section 5(2) and section 9 of the Income Tax Act. 23 shall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h amount of commission/legal and professional charges paid is enclosed as Annexure-A. Nature of service provided by each party is enclosed as Annexure-B. We would like to submit that after due negotiation we raise sale orders to our customers & in sale order the name of commission agent and percentage of commission payable is provided. The copies of some of the sales orders attached for your perusal. The commission is calculated on pre agreed percentage of sale value through particular commission agent. There is proper control over quality of service rendered, as commission is paid/credited to agent only when the amount of sale initiated through him is fully realized. The track record of agent as to promotion of the sales and timely realization of sales made through him plays a pivotal role in his quality of service. We hope you will find the above in order and suffice to your requirement" 3.2. I have given careful consideration to the issue in hand. The dynamics of taxation of the remittance made to non-resident by an entity in India has been analyzed by Hon'ble jurisdictional ITAT in the case of IDS Infotech Ltd. v. Deputy Commissioner of Income-tax, Circle 4(1), ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt made to a nonresident are provided in section 195 of the Act, which read as under : "195(1) Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest (not being interest on securities) 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: " 27. The most important terms in this section are "chargeable under the provisions of this Act". From this, it is very clear that only if an amount is chargeable under the Income Tax Act, the liability to deduct tax on the payment of such amount arises. Charge of income tax is provided under section 4 of the Act, while scope of total income is provided in section 5 of the Act. The provisions of section 5 of the Act relating to scope of total income in respect of a non-resident are provided in sub-section (2) of said section, which read as under: "5(2) Subject to the provisions of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comes 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 I]: For the purposes of this clause- (a) 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; (b) 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us.]" 3.2.2 It is to be judged from the facts and circumstances of the present case, whether the impugned payments are deemed to accrue or arise in India to the respective recipients, as we have already mentioned that only those payments which are of the nature of sum chargeable under the provisions of the Act are exigible for provision of tax deduction at source. Here we are inclined to refer to the judgment of the Hon'ble Supreme Court in the case of GE India Technology Centre (P.) Ltd. v. CIT [2010] 327 ITR 456/193 Taxman 234/7 taxmann.com 18, whereby it has been held that section 195(1) of the Act uses the expression 'sum' chargeable under the provision of the Act and weightage is needed to be given to these words. Further, section 195 uses the word 'payer' and not the word 'assessees'. The payer is not assessee. The payer becomes an assessee in default only when he fails to fulfil statutory obligation under section 195(1) of the Act. If the payment does not have the element of the income, the payer cannot be made liable. The Hon'ble Supreme Court thus rejected the contention of the Department by holding that if the sum paid is not chargeable t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e apart from prosecution under section 276B. Thus, section 195 imposes a statutory obligation on any person responsible for paying to a non-resident, any interest (not being interest on securities) or any other sum (not being dividend) chargeable under the provisions of the Income-tax Act, to deduct income-tax at the rates in force unless he is liable to pay income-tax thereon as an agent. Payment to non-residents by way of royalty and payment for technical services rendered in India are common examples of sums chargeable under the provisions of the Income-tax Act to which the afore-stated requirement of tax deduction at source applies. The tax so collected and deducted is required to be paid to the credit of the Central Government in terms of section 200 of the Income-tax Act read with rule 30 of the Income-tax Rules, 1962. Failure to deduct tax or failure to pay tax would also render a person liable to penalty under section 201 read with section 221 of the Income-tax Act. In addition, he would also be liable under section 201(1A) to pay simple interest at 12 per cent per annum on the amount of such tax from the date on which such tax was deductible to the date on which such tax i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion to the Income-tax Officer (TDS) for determining the amount. It is only when these conditions are satisfied and an application is made to the Income-tax Officer (TDS) that the question of making an order under section 195(2) will arise. In fact, at one point of time, there was a provision in the Income-tax Act to obtain a NOC from the Department that no tax was due. That certificate was required to be given to the RBI for making remittance. It was held in the case of Czechoslovak Ocean Shipping International Joint Stock Company v. ITO [1971] 81 ITR 162 (Cal.) that an application for NOC cannot be said to be an application under section 195(2) of the Act. While deciding the scope of section 195(2) it is important to note that the tax which is required to be deducted at source is deductible only out of the chargeable sum. This is the underlying principle of section 195. Hence, apart from section 9(1), sections 4, 5, 9, 90, 91 as well as the provisions of the DTAA are also relevant, while applying tax deduction at source provisions. Reference to the Income-tax Officer (TDS) under section 195(2) or 195(3) either by the non-resident or by the resident payer is to avoid any future has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Therefore, section 195 has to be read in conformity with the charging provisions, i.e., sections 4, 5 and 9. This reasoning flows from the words "sum chargeable under the provisions of the Act" in section 195(1). The fact that the Revenue has not obtained any information per se cannot be a ground to construe section 195 widely so as to require deduction of TAS even in a case where an amount paid is not chargeable to tax in India at all. We cannot read section 195, as suggested by the Department, namely, that the moment there is remittance the obligation to deduct TAS arises. If we were to accept such a contention it would mean that on mere payment income 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). While interpreting a section one has to give weightage to every word used in that section. While interpreting the provisions of the Income-tax Act one cannot read the charging sections of that Act de hors the machinery sections. The Act is to be read as an integrated code. Section 195 appears in Ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e in India, the Government would nonetheless collect tax. In our view, section 195(2) provides a remedy by which a person may seek a determination of the "appropriate proportion of such sum so chargeable " where a proportion of the sum so chargeable is liable to tax. The entire basis of the Department's contention is based on administrative convenience in support of its interpretation. According to the Department, huge seepage of revenue can take place if persons making payments to non-residents are free to deduct TAS or not to deduct TAS. It is the case of the Department that section 195(2), as interpreted by the High Court, would plug the loophole as the said interpretation requires the payer to make a declaration before the Income-tax Officer (TDS) of payments made to non-residents. In other words, according to the Department, section 195(2) is a provision by which the payer is required to inform the Department of the remittances he makes to non-residents by which the Department is able to keep track of the remittances being made to non-residents outside India. We find no merit in these contentions. As stated hereinabove, section 195(1) uses the expression "sum chargeable un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on's case [1999] 239 ITR 587 (SC) a non-resident had entered into a composite contract with the resident party making the payments. The said composite contract not only comprised supply of plant, machinery and equipment in India, but also comprised the installation and commissioning of the same in India. It was admitted that the erection and commissioning of plant and machinery in India gave rise to Income-taxable in India. It was, therefore, clear even to the payer that payments required to be made by him to the non-resident included an element of income which was exigible to tax in India. The only issue raised in that case was whether TDS was applicable only to pure income payments and not to composite payments which had an element of income embedded or incorporated in them. The controversy before us in this batch of cases is, therefore, quite different. In Transmission Corporation case [1999] 239 ITR 587 (SC) it was held that TAS was liable to be deducted by the payer on the gross amount if such payment included in it an amount which was exigible to tax in India. It was held that if the payer wanted to deduct TAS not on the gross amount but on the lesser amount, on the footi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion agents is outside the territories of India. The argument of the Assessing Officer that the sales pertain to Indian entity does not hold good ground because by that analogy each and every sale would become taxable in India. In consideration of the decided cases as above and the facts of the present case, it can be concluded that since there exists no income chargeable to tax having accrued or arisen to the foreign commission agents in India, therefore provisions of tax withholding are not applicable. Under such circumstances, there was no default as contemplated under section 40 (a) (ia) of Income Tax Act. 7. Ld. DR relied on the order of the Assessing Officer. 8. We have gone through the facts of the case and find that (a) the agents abroad were non-residents operating outside India; (b) the commission paid relates to services provided outside India; (c) the agents did not have any permanent establishment in India; and (d) the amounts were remitted directly outside India. Reliance is also placed on the judgment of Hon'ble Madras High Court in case of Farida Leather Company in appeal no. 484 of 2015 dt. 02/01/2016 wherein it was held that Merely because a person has not deduc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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