M/S MODERN THREADS (INDIA) LTD.,JAIPUR vs. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-6, JAIPUR

आयकर अपीलीय अधिकरण] जयपुर न्यायपीठ] जयपुर IN THE INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCHES, ‘B’ JAIPUR Jh lanhi xkslkbZ] U;kf;d lnL; ,oa Jh foØe flag ;kno] ys[kk lnL; ds le{k BEFORE: SHRI SANDEEP GOSAIN, JM & SHRI VIKRAM SINGH YADAV, AM vk;dj vihy la-@ITA Nos. 198/JP/2019 fu/kZkj.k o"kZ@Assessment Year :2014-15 cuke Modern Threads India Limited, ACIT, Vs. A-4, Vijay Path, Tilak Nagar, Circle-6, Jaipur Jaipur LFkk;h ys[kk la-@thvkbZvkj la-@PAN/GIR No.: AABCM1850A vihykFkhZ@Appellant izR;FkhZ@Respondent vk;dj vihy la-@ITA Nos. 199/JP/2019 fu/kZkj.k o"kZ@Assessment Year :2015-16 cuke Modern Threads India Limited, DCIT, Vs. A-4, Vijay Path, Tilak Nagar, Circle-6, Jaipur Jaipur LFkk;h ys[kk la-@thvkbZvkj la-@PAN/GIR No.: AABCM1850A vihykFkhZ@Appellant izR;FkhZ@Respondent fu/kZkfjrh dh vksj ls@ Assessee by : Shri Madhukar Garg (CA) jktLo dh vksj ls@ Revenue by : Smt. Runi Pal (JCIT) lquokbZ dh rkjh[k@ Date of Hearing : 21/12/2020 mn?kks"k.kk dh rkjh[k@Date of Pronouncement: 15/02/2021 vkns'k@ ORDER PER: VIKRAM SINGH YADAV, A.M. These are two appeals filed by the assessee against the orders of ld. CIT(A), Ajmer dated 10.12.2018 & 14.12.2018 for AY 2014-15 & 2015-16 respectively. Since the common issues are involved, both these appeals were heard together and are being disposed off by this consolidated order.

ITA No. 198 & 199/JP/2019 Modern Threads India Ltd, Jaipur Vs. ACIT, Jaipur 2. In for A.Y 2014-15, the assessee has taken the following grounds of appeal:- “1. That the learned CIT(Appeals) has erred in holding that the A/R of the appellant was specifically requested to clarify whether any ruling was obtained from the authority for advance ruling u/s 245R(2) regarding non-taxability of the income of the recipient and the A/R submitted that no such ruling was obtained from AAR. The said finding is incorrect as no such clarification was sought for during the course of appellate proceedings.

2. That the learned CIT(Appeals) has erred in holding that argument of the appellant that since non-resident persons to whom payments were made did not have any place of business or business connection in India and therefore, the appellant was not required to deduct tax at source is not correct. The said finding is illegal and unjustified.

3. That the learned CIT(Appeals) has erred in holding that there is no evidence on record to show that the sum received by the non-residents in the form of sales commission of Rs. 99,84,435/- was not chargeable to tax under the Income-tax Act. The said finding is illegal and unjustified.

4. That the learned CIT(Appeals) has erred in confirming disallowance of Rs. 99,84,435/- on account of non-deduction of tax at source while making payment of sale commission to non-residents. The disallowance confirmed is illegal and unjustified.”

4. Grounds No. 2-4 of assessee’s appeal are against the action of the ld CIT(Appeals) in confirming the disallowance of Rs.99,84,435/- u/s 40(a)(i) on account of non-deduction of tax at source while paying sales commission to non-residents.

5. In this regard, the ld AR submitted that the appellant company is a public limited company deriving income from polyester viscose, blended woolen yarn etc. and the company was declared a sick company by the Board of Financial Reconstruction on 21.5.2005. The Assessing Officer while completing the assessment has mentioned that the company had paid commission of Rs.99,84,435/- to foreign agents as sales commission during the year and no tax was deducted at source as per the provisions of section 195. The assessee in response to the show cause notice has filed a detailed reply which has been reproduced by the Assessing Officer from pages 3-7 of the order. However, the Assessing Officer had not accepted the contention of the assessee that no tax was required to be deducted at source and relying on Explanation 2 to Section 195(1) introduced by the Finance Act, 2012 with retrospective effect from 1.4.1962 held that the payment of commission by the assessee is nothing but a fee which has been paid by the resident assessee to non-resident for technical services rendered by him holding that the commission was fee for technical services and the assessee was required to deduct tax at source on the said payment. He, therefore, disallowed the sum of Rs.99,84,435/- by applying the provisions of section 40(a)(i) of the Act.

6. The assessee had preferred an appeal against the said order and it was pointed out to the ld CIT(Appeals) that as per the provisions of section 195(1), 3 & 199/JP/2019 Modern Threads India Ltd, Jaipur Vs. ACIT, Jaipur it is clear that tax is required to be deducted at source under the provisions of section 195(1) only in respect of sum chargeable to tax under the provisions of the Act. It was also contended that the amount paid by the assessee not being chargeable to tax in India in respect of payee, no tax was required to be deducted at source and reliance was placed on the decision of Supreme Court in the case of G.E.(India) Technology Centre (P) Limited vs. CIT reported in 327 ITR 456 as well as another decision of Supreme Court in the case of Vijay Ship Breaking Corporation vs. CIT 314 ITR 309. The assessee had also relied on number of cases of various High Courts in which it was held that no tax was required to be deducted at source in respect of payment of commission to non- resident agents. The assessee had also filed complete details of commission paid as well as certificate from the payees that commission received by them was in the nature of their business income and they were not having any permanent establishment in India. The ld CIT(Appeals) has discussed this matter in para 6 of his order and his finding has been given in para 6.3 on page 13 wherein he has held that argument of the assessee that since the non- resident persons to whom payments were made do not have a place of business or business connection in India and therefore, he was not required to deduct tax at source is not correct. The ld CIT(Appeals) has held that there is no order or finding by any Income-tax authority that the sum of Rs.99,84,435/- was not chargeable to tax under the Income-tax Act, 1961. The assessee was required to deduct tax at source whether or not the non-resident had a residence or place of business or business connection in India, he had therefore, confirmed the disallowance of Rs.99,84,435/-.

7. In the aforesaid factual background, it was submitted that reliance placed by the Assessing Officer as well as the learned CIT(Appeals) on Explanation 2 to section 195(1) of the IT Act which has been introduced by the Finance Act, 2012 with retrospective effect from 1.4.62 is misplaced. The 4 & 199/JP/2019 Modern Threads India Ltd, Jaipur Vs. ACIT, Jaipur learned CIT(Appeals) as well as the Assessing Officer has failed to appreciate the provisions of section 195 of the IT Act. From the provisions of section 195(1), it is clear that any person responsible for paying to a non-resident any interest or any other sum chargeable to tax under the provisions of the Act, shall, at the time of credit of such income to the account of the payee, deduct income tax thereon at the rates in force. Thus, it is quite clear that tax is required to be deducted at source from the element of income embedded in the total payment being made by the person responsible in respect thereof, to the non-resident entity. If the amount paid by the assessee is not chargeable to tax in India in respect of the payee, no tax is required to be deducted at source. Reliance in this regard is placed on the decision of Hon’ble Supreme Court in the case of GE(India) Technology Centre (P) Ltd. Vs. CIT reported in 327 ITR 456 wherein it has been held by the Hon’ble Supreme Court that "The most important expression in section 195(1) of the Income-tax Act, 1961, dealing with deduction of tax at source 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 Act. 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 imbedded or incorporated in them. The obligation to deduct tax at source, is, however, limited to appropriate proportion of income chargeable under the Act forming part of the gross sum of money payable to the non-resident. It is for this reason that the CBDT has clarified in Circular No.728 dated October, 31, 1995, that the tax deductor can take into consideration the effect of the DTAA in respect of payments of royalties and technical fees while deducting TDS.

8. It was submitted that the expression “chargeable under the provisions of the Act” in section 195(1) shows that the remittance has got to be of a trading 5 & 199/JP/2019 Modern Threads India Ltd, Jaipur Vs. ACIT, Jaipur receipt, the whole or part of which is liable to tax in India. If tax is not so assessable, there is no question of tax at source being deducted. The Hon’ble Supreme Court has also referred to its another decision in the case of Vijay Ship Breaking Corporation vs. CIT reported in 314 ITR 309. It was held by the Supreme Court that if the contention of the Department that the moment there is a remittance the obligation to deduct TDS 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 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 TDS only if tax is assessable in India. If tax was not assessable, there is no question of TDS being deducted.

Thus, in both the circulars the Board has also mentioned that tax is required to be deducted only in respect of sum chargeable to tax.

“The payment in question is commission and prima facie not royalty or fee for technical services (FTS). The Assessing Officer though observed that the payment in the nature of FTS, however, the Assessing Officer has not examined or not given the finding as to how the payment in question is FTS and what is the nature of service rendered by the non- resident. Even otherwise the issue of FTS has to be considered in light of definition provided in respect the DTAA. It is found that the 8 & 199/JP/2019 Modern Threads India Ltd, Jaipur Vs. ACIT, Jaipur Commissioner(Appeals) for the assessment year 2013-14 has clearly given a finding that the payment in question is not fee for technical services but it is a regular payment to the non-resident in the nature of ordinary course of business. Even otherwise the Commissioner(Appeals) has upheld the order of the Assessing Officer only on the ground that as per the Explanation II of section 195(1), the assessee was under obligation to deduct the tax at source for making the payment of commission to non-resident. Therefore, the Commissioner(Appeals) has accepted the nature of payment as commission and not fee for technical service(Para 5). Once the payment in question is commission then the provisions of section 40(a)(i) are applicable only if such sum is chargeable to tax under the Act. As per the provisions of section 5(2), the total income of non-resident includes all income from whatsoever sources derived which is received or deemed to be received in India accrues or arises or is deemed to accrue or arise to him in India during such year….

Therefore, the commission paid to non-resident outside India for the services rendered outside India will not fall in the category of the income received or deemed to be received in India as well as accrues or arises or is deemed to accrue or arise in India. Thus, the said amount paid to non- resident does not fall in the scope of total income of non-resident and, consequently, it is not chargeable to tax in India under the provisions of the Act. Even otherwise the said income in the hands of non-resident has to be considered in the light of the provisions of DTAA between India and the Country of the resident. In the absence of PE of the non-resident in India such business income is not chargeable to tax in India. Accordingly, in the facts and circumstances of the case when the amount paid by the assessee is not chargeable to tax in India then the assessee 9 & 199/JP/2019 Modern Threads India Ltd, Jaipur Vs. ACIT, Jaipur is not liable to deduct TDS and consequently, the provisions of section 40(a)(i) cannot be invoked for making the disallowance. In the facts and circumstances of the case the disallowance made by the Assessing Officer under section 40(a)(i) is deleted(Para 5)”.

Further, reliance was placed on ITAT Jaipur Bench decision in case of JLC Electromet P Ltd vs ACIT reported in [2019] 75 ITR (Trib)13. In view of above, it was submitted that there was no liability on the part of the assessee to deduct any tax at source in respect of commission paid to foreign agents and the disallowance made by the Assessing Officer which has been confirmed by the learned CIT(Appeals) deserves to be deleted.

"the obligation to comply with sub section (I) and to make deduction there under applies and shall be deemed to have always applied and extends and shall be deemed to have always extended to all persons, resident or nonresident, whether or not the non-resident person has (i) a residence or place of business & 199/JP/2019 Modern Threads India Ltd, Jaipur Vs. ACIT, Jaipur or business connection in India; or (ii) any other presence in any manner whatsoever in India'.

“23. We have heard the rival contentions and perused the material available on record. During the course of assessment proceedings, the Assessing Officer found that the assessee has made payment of selling commission, exhibition expenses and testing expenses to various non- resident entities, without deducting tax at source and a show cause was issued as to why this payment should not be disallowed u/s 40(a)(ia) in view of insertion of Explanation 2 to section 195 by the Finance Act, 2012 with retrospective effect from 01.04.1962. In response, the assessee submitted that it is not required to deduct any tax at source as per provisions of section 195(1) since these payments are not chargeable to tax in India as no income accrues or arises in India in respect of these transactions in the hands of the non-resident entities, the services have been rendered outside India by these non-resident entities and the payment have also been made outside of India. It was submitted that 12 & 199/JP/2019 Modern Threads India Ltd, Jaipur Vs. ACIT, Jaipur the commission has been paid in respect of export sales made to non- resident outside of India and the services for earning commission income by the non-resident has been rendered outside of India. It was further submitted that the exhibition expenses have been incurred in respect of participation in various exhibition outside of India and the testing charges were paid to non-resident for getting the samples/goods tested outside India. We therefore find that the Assessing Officer has not disputed the nature of the payments so made by the assessee to the non-resident entities and also the fact that the services have been rendered outside of India and the payment have been made outside of India. The only reason why the Assessing officer has disallowed these expenses is in view of the Explanation 2 to Section 195 which reads as under:- “Explanation 2 – For the removal of doubts, it is hereby clarified that the obligation to comply with sub section (1) and to make deduction there under applies and shall be deemed to have always applied and extends and shall be deemed to have always extended to all persons, resident or non-resident, whether or not the non- resident person has (i) a residence or place of business or business connection in India; or (ii) any other presence in any manner whatsoever in India.”

& 199/JP/2019 Modern Threads India Ltd, Jaipur Vs. ACIT, Jaipur 25. Section 195 (1) provides that 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 shall deduct income tax thereon at the rates in force. Therefore, what needs to be examined in the instant case is whether the payment of commission and other charges are chargeable under the provisions of this Act. In Explanation 2, it has been clarified that the obligation to comply under sub-section (1) to make deduction applies to all person resident or non-resident whether or not the non-resident has a residence or place of business or business connection in India or any other presence in any manner whatsoever in India.

& 199/JP/2019 Modern Threads India Ltd, Jaipur Vs. ACIT, Jaipur “Section 195 of the Income-tax Act requires any person to deduct tax at source before making payments to a non-resident if the income of the such non-resident is chargeable to tax in India. “Person”, here, will take its meaning from section 2 and would include all persons, whether resident or non-resident. Therefore, a non-resident person is also required to deduct tax at source before making payments to another non-resident, if the payment represents income of the payee non-resident, chargeable to tax in India. There are no other conditions specified in the Act and if the income of the payee non-resident is chargeable to tax, then tax has to be deducted at source, whether the payment is made by a resident or a non-resident.”

“8. With regard to substantial question of law referred to above, we find that in the judgment of the learned Division Bench in the case of Gujarat Reclaim & Rubber Products Ltd (supra) it has been, inter alia, held that before effecting deduction at source one of the aspects to be examined is whether such income is taxable in terms of the Income Tax Act. This aspect has not been considered by learned Tribunal while concluding that the Appellant has committed a default in not deducting the tax at source. As the said learned Division Bench Judgment was not available while passing the impugned order by the learned Tribunal, we find it 15 & 199/JP/2019 Modern Threads India Ltd, Jaipur Vs. ACIT, Jaipur appropriate, in the interest of justice, to quash and set aside the impugned order of the learned Tribunal to the extent it holds that the Appellant has defaulted in not deducting tax at source and remand the matter to the learned Tribunal to examine the said aspect afresh in the light of the judgment of this Court after hearing the parties in accordance with law. All contentions on that count are kept open.”

“Once the payment in question is commission then the provisions of Section 40 (a)(i) of the Act are applicable only if such sum is chargeable to tax under this Act. As per provisions of Section 5(2) of the Act the total income of non-resident includes all income from whatsoever sources derived which is received or deemed to be received in India accrues or arises or is deemed to accrue or arise to him in India during such year. For ready reference we quote to Section 5(2) reproduced as under:-

& 199/JP/2019 Modern Threads India Ltd, Jaipur Vs. ACIT, Jaipur “5(2) Subject to11 the provisions of this Act, the total income12 of any previous year of a person who is a non-resident includes all income from whatever source derived which— (a) is received14 or is deemed to be received in India in such year by or on behalf of such person ; or (b) accrues or arises14 or is 14deemed 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 received14 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 accrued15 or arisen15 or is deemed to have accrued15 or arisen15 to him shall not again be so included on the basis that it is received or deemed to be received by him in India.

Therefore, commission paid to non-resident outside India for the services rendered outside India will not fall in the category of the income received for deemed or received in India as well as accrues or arises or is deemed to accrue or arise in India. Thus, the said amount paid to non-resident does not fall in the scope of total income of non-resident and consequently it is not chargeable to tax in India under the provisions of the Act. Even otherwise the said income in the hands of non-resident has to be considered in the light of the provisions of DTAA between India and the Country of the non-resident. In the absence of P.E. of the non-resident in India such business income is not chargeable to tax in India. Accordingly, in the facts and circumstances of the case when the amount paid by the assessee is not chargeable to tax in India then & 199/JP/2019 Modern Threads India Ltd, Jaipur Vs. ACIT, Jaipur the assessee is not liable to deduct TDS and consequently the provisions of Section 40(a)(i) of the Act cannot be invoked for making the disallowance. In the facts and circumstances of the case the disallowance made by the AO U/s 40(a)(i) of the Act is deleted. In the result, the appeal filed by the assessee is allowed.”

In the result, both the appeals filed by the assessee are allowed.

Order pronounced in the Open Court on 15/02/2021.