TMI Blog2018 (5) TMI 2086X X X X Extracts X X X X X X X X Extracts X X X X ..... ient / foreign agent is established. In this case, the primary tax liability of the foreign agent is not established. Therefore, the vicarious liability on the part of the assessee to deduct the tax at source does not exist. In the instant case, it is seen, admittedly that the nonresident agents were only procuring orders abroad and following up payments with buyers. No other services were rendered other than the above. Sourcing orders abroad, for which payments have been made directly to the non-residents abroad, does not involve any technical knowledge or assistance in technical operations or other support in respect of any other technical matters. It also does not require any contribution of technical knowledge, experience, expertise, skill or technical know-how of the processes involved or consists in the development and transfer of a technical plan or design. The parties merely source the prospective buyers for effecting sales by the assessee. When the transaction does not attract the provisions of Section 9 of the Act, the Revenue has no case and the appeal is liable to be dismissed - Decided in favour of assessee. Commission on sales has been paid to one M/s Excel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e made to parties who were outside India. The Learned Assessing Officer ought to have appreciated the legal fact that the provisions of Section 195 of Income Tax Act, 1961 would be applicable in conjunct with Section 9 of the Income Tax Act, 1961 which deals with income deemed to accrue or arise in India. The Learned Assessing Officer ought to have appreciated the fact that the parties to whom payments were made had no Permanent Establishment(P.L) in India. The circular of CBDT. Double Taxation Avoidance Agreement (DTAA) have been brushed aside by the Ld.AO in a casual way with ;i predetermined mind to disallow the expenditure In this regard it is stated as under: Provisions as per Income Tax Act:- a. Section 195 states that a person responsible for making payment to non-corporate nonresident assessee or to a company other than domestic company, of any interest other than interest on securities) or any other sum ( not being salary) is required, at the time of payment or at the time of credit to the account of payee, interest payable account, or suspense account, or at the time of payment, whichever is earlier to deduct income tax thereon at the rate prescribed by the relevant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and section 9 of the Income Tax Act. 23 shall prevail. No tax is therefore deducible under section 195 and consequently the expenditure on export commission and other related charges payable to a non-resident for services rendered outside India becomes allowable expenditure . Taxability depends on payment Establishment (PE). If any non-resident has no payment Establishment (PE) in India, then any commission attributable will not be taxed in India. If the foreign agent has got a PE in India. Then the commission income that is attributable to it would get taxed in India. Usually the foreign agents operate India and hence do not have PE in India. However, these circulars (No. 23 dated 23-07-1969 dated 29-05-1975 and No. 786 dated 07-02-2000) has been withdrawn vide Circular No. 7 dated 22-01-2009. But this withdrawal of these circulars does not mean that export commission to overseas agents has become taxable in India. 9extract of book Direct Taxes Reckoner-Dr. Vinod K. Singhania is enclosed herewith as Annexure -2) The case laws relied upon by the assessing officer has no direct bearing to the appellant company. The same are inapplicable to the facts and circumstances of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of IDS Infotech Ltd. v. Deputy Commissioner of Income-tax, Circle 4(1), Chandigarh [2016] 69 taxmann.com 393 (Chandigarh -Trib.) and the following has been held: 25. The basic issue is whether the tax is to be deducted while making these impugned payments. The Assessing Officer has invoked the provisions of section 40(a)(i) of the Act in this regard. The provisions of section 40(a) (i) of the Act to the extent relevant in the present case reads as under: 40(a)(i) Notwithstanding anything to the contrary in [sections 30 to 38], the following amounts shall not be deducted in computing the incom(e chargeable under the head Profits and gains of business or profession : (a) in the case of any assessee- [(i) any interest (not being interest on a loan issued for public subscription before the 1st day of April, 1938), royalty, fees for technical services or other sum chargeable under this Act, which is payable,- (A) outside India; or (A) in India to a non-resident, not being a company or to a foreign company, on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid [during the previous y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n sub-section (2) of said section, which read as under: 5(2) Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which- (a) is received or is deemed to be received in India in such year by or on behalf of such person; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year. Explanation 1-Income accruing or arising outside India shall not be deemed to be received in India within the meaning of this section by reason only of the fact that it is taken into account in a balance sheet prepared in India. Explanation 2 - For the removal of doubts, it is hereby declared that income which has been included in the total income of a person on the basis that it has accrued or arisen or is deemed to have accrued or arisen to him shall not again be so included on the basis that it is received or deemed to be received by him in India. 28. From the bare perusal of the provisions of the above section, it is quite clear that a non-resident is chargeable to tax if it receives or deemed to receive any amount in India. The provisions emerging from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o 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 who is not a citizen of India; or (2) a firm which does not have any partner who is a citizen of India or who is resident in India; or (3) a company which does not have any shareholder who is a citizen of India or who is resident in India, no income shall be deemed to accrue or arise in India to such individual, firm or company through or from operations which are confined to the shooting of any cinematograph film in India;] no income shall be deemed to accrue or arise in India to such individual, firm or company through or from operations which are confined to the shooting of any cinematograph film in India;] [Explanation 2: For the removal of doubts, it is hereby declared that business connection shall include any business activity carried out through a person who, acting on behalf of the non-resident, (a) has and habitually exercises in India, an authority to conclude contracts on behalf of the non-resident unless his activities are limited to the purchase of goods or merc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Supreme Court thus rejected the contention of the Department by holding that if the sum paid is not chargeable to tax, then no tax is required to be deducted. .2.3. As explained, in CIT v. R.D. Aggarwal Co. [1965] 56 ITR 20 (SC), which stands referred to in CIT v. Toshoku Ltd. [1980] 125 ITR 525 (SC), and continues to govern the field, business connection involves the relationship between the business carried on by a nonresident (outside taxable territories), which yields profits or gains, and some activity in the taxable territories which contributes directly or indirectly to the earning of those profits and gains. It predicates an element of continuity, and postulates a real and intimate relation between the trading activity carried on outside the taxable territories and the trading activity within the territories, the relation between the two contributing to the earning of income by the non-resident in his trading activity - the Agents in the present case. The matter is, thus, principally and primarily factual. 3.2.4 In the facts of the case, the commission is for soliciting sale orders. No part of the said activity is stated as carried out in India. where there is admit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t per annum on the amount of such tax from the date on which such tax was deductible to the date on which such tax is actually paid. The most important expression in section 195(1) consists of the words chargeable under the provisions of the Act . A person paying interest or any other sum to a non-resident is not liable to deduct tax if such sum is not chargeable to tax under the Income-tax Act. For instance, where there is no obligation on the part of the payer and no right to receive the sum by the recipient and the payment does not arise out of any contract or obligation between the payer and the recipient but is made voluntarily, such payments cannot be regarded as income under the Income-tax Act. It may be noted that section 195 contemplates not merely amounts, the whole of which are pure income payments, it also covers composite payments which have an element of income embedded or incorporated in them. Thus, where an amount is payable to a non-resident, the payer is under an obligation to deduct TAS in respect of such composite payments. The obligation to deduct TAS is, however, limited to the appropriate proportion of income chargeable under the Act forming part of the gros ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (TDS) under section 195(2) or 195(3) either by the non-resident or by the resident payer is to avoid any future hassles for both resident as well as non-resident. In our view, section 195(2) and 195(3) are safeguards. The said provisions are of practical importance. This reasoning of ours is based on the decision of this court in Transmission Corporation in which this court has observed that the provision of section 195(2) is a safeguard. From this it follows that where a person responsible for deduction is fairly certain then he can make his own determination as to whether the tax was deductible at source and, if so, what should be the amount thereof. Submissions andfindings thereon 8. If the contention of the Department that the moment there is remittance the obligation to deduct TAS arises is to be accepted then we are obliterating the words chargeable under the provisions of the Act in section 195(1). The said expression in section 195(1) shows that the remittance has got to be of a trading receipt, the whole or part of which is liable to tax in India. The payer is bound to deduct TAS only if the tax is assessable in India. If tax is not so assessable, there is no ques ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions of that Act de hors the machinery sections. The Act is to be read as an integrated code. Section 195 appears in Chapter XVII which deals with collection and recovery. As held in the case of CIT v. Eli Lilly and Co. (India) (P.) Ltd. [2009] 312 ITR 225 the provisions for deduction of TAS which are in Chapter XVII dealing with collection of taxes and the charging provisions of the Income-tax Act form one single integral, inseparable code and, therefore, the provisions relating to TDS apply only to those sums which are chargeable to tax under the Income-tax Act. It is true that the judgment in Eli Lilly [2009] 312 ITR 225 was confined to section 192 of the Income-tax Act. However, there is some similarity between the two. If one looks at section 192 one finds that it imposes statutory obligation on the payer to deduct TAS when he pays any income chargeable under the head salaries . Similarly, section 195 imposes a statutory obligation on any person responsible for paying to a nonresident any sum chargeable under the provisions of the Act , which expression, as stated above, do not find place in other sections of Chapter XVII. It is in this sense that we hold that the Income-t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ia. We find no merit in these contentions. As stated hereinabove, section 195(1) uses the expression sum chargeable under the provisions of the Act. We need to give weightage to those words. Further, section 195 uses the word payer and not the word assessee . The payer is not an assessee. The payer becomes an assessee-in-default only when he fails to fulfil the statutory obligation under section 195(1). If the payment does not contain the element of income the payer cannot be made liable. He cannot be declared to be an assessee-in-default. The abovementioned contention of the Department is based on an apprehension which is illfounded. The payer is also aft assessee under the ordinary provisions of the Income-tax Act. When the payer remits an amount to a non-jesident out of India he claims deduction or allowances under the Income-tax Act for the said sum as an expenditure . Under section 40(a) (i), inserted, vide Finance Act, 1988, with effect from April 1, 1989, payment in respect of royalty, fees for technical services or other sums chargeable under the Incometax Act would not get the benefit of deduction if the assessee fails to deduct TAS in respect of payments outside Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India. It was held that if the payer wanted to deduct TAS not on the gross amount but on the lesser amount, on the footing that only a portion of the payment made represented income chargeable to tax in India , then it was necessary for him to make an application under section 195(2) of the Act to the Income-tax Officer (TDS) and obtain his permission for deducting TAS at lesser amount. Thus, it was held by this court that if the payer had a doubt as to the amount to be deducted as TAS he could approach the Income-tax Officer (TDS) to compute the amount which was liable to be deducted at source. In our view, section 195(2) is based on the principle ofproportionality . The said subsection gets attracted only in cases where the payment made is a composite payment in which a certain proportion of payment has an element of income chargeable to tax in India. It is in this context that the Supreme Court stated, If no such application is filed, income-tax on such sum is to be deducted and it is the statutory obligation of the person responsible for paying such 'sum' to deduct tax thereon before making payment. He has to discharge the obligation to TDS . If one reads the obs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Farida Leather Company in appeal no. 484 of 2015 dt. 02/01/2016 wherein it was held that Merely because a person has not deducted tax at source or a remittance abroad, it cannot be inferred that the person making the remittance, has committed a default in discharging his tax withholding obligations because such obligations come into existence only when the recipient has a tax liability in India. The tax withholding liability of the payer is inherently a vicarious liability on behalf of the recipient and therefore, when the recipient / foreign agent do not have the primary liability to be taxed in respect of income embedded in the receipt, the vicarious liability of the payer to deduct tax does not arise. This vicarious tax withholding liability cannot be invoked, unless primary tax liability of the recipient / foreign agent is established. In this case, the primary tax liability of the foreign agent is not established. Therefore, the vicarious liability on the part of the assessee to deduct the tax at source does not exist. 9. In the instant case, it is seen, admittedly that the nonresident agents were only procuring orders abroad and following up payments with buyers. No other ..... X X X X Extracts X X X X X X X X Extracts X X X X
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