M/S. SATYAM POLYPLAST,JAIPUR vs. ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE-4, JAIPUR

आयकर अपीलीय अधिकरण] जयपुर न्यायपीठ] जयपुर IN THE INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCHES,”A” JAIPUR Jh jes’k lh0 ’kekZ] ys[kk lnL; ,oa Jh fot; iky jko] U;kf;d lnL; ds le{k BEFORE: SHRI RAMESH. C. SHARMA, AM & SHRI VIJAY PAL RAO, JM vk;dj vihy la-@ITA No. 158/JP/2019 fu/kZkj.k o"kZ@Assessment Year : 2015-16 cuke Satyam Polyplast The DCIT, Vs. G-1/41, VKI Area Extension, Circle-4, Badharana, Jaipur. 302013. Jaipur. LFkk;h ys[kk la-@thvkbZvkj la-@PAN/GIR No.: AASFS 7334 R vihykFkhZ@Appellant izR;FkhZ@Respondent fu/kZkfjrh dh vksj ls@ Assessee by: Shri V.K. Jain (C.A.) jktLo dh vksj ls@ Revenue by : Shri K.C. Meena (ACIT) lquokbZ dh rkjh[k@ Date of Hearing : 08/05/2019 mn?kks"k.kk dh rkjh[k@Date of Pronouncement: 14/05/2019 vkns'k@ ORDER

PER: VIJAY PAL RAO, J.M. This appeal by the assessee is directed against the order dated

27.12.2018 of the ld. CIT(A), Ajmer for the assessment year 2015-16. The solitary ground raised by the assessee in this appeal is as under:-

“1. The Learned CIT(A) erred in sustaining addition of Rs. 38,92,787/- being disallowance of commission paid to non residents U/s 40(a)(ia). Therefore being no liability to deduct tax at source disallowance made is illegal and addition of Rs. 38,92,787/- made deserves to be deleted.”

ITA No. 158/JP/2019 Satyam Polyplast vs. DCIT

manufacturing of PP Bags. During the assessment proceedings, the AO

noted that the assessee has paid commission of Rs. 38,92,787/- to

various nonresident entities without making TDS. Accordingly, the AO

has proposed to make disallowance of the said commission by invoking

the provisions of Section 40(a)(i) r.w.s. 195 of the Act. In response the

assessee submitted that the assessee engaged in the business of export

of its final products and for this purpose, the assessee has tie up with

non-resident persons for procuring the sales orders on behalf of the

assessee. After exporting the goods and receiving the payment in

foreign currency, the assessee paid commission to such non-resident

persons for services rendered outside India. Thus the assessee

contended that the payment made by the assessee to non-resident is

not liable to tax in India and therefore, the assessee was under no

obligation to deduct TDS and consequently the provisions of Section

40(a)(i)of the Act cannot be invoked. The AO did not accept this

contention of the assessee and referred to the Explanation II of Section

195 (1) of the Act inserted by Finance Act, 2012 on the point that

whether the non-resident person has placed of business or business

connection in India the provisions of Section 195(1) are applicable. The 2

ITA No. 158/JP/2019 Satyam Polyplast vs. DCIT

AO accordingly, held that the provisions of Section 195(1) are applicable

in all the cases whether the payment is made to non-resident without

deduction of TDS and consequently the provisions of Section 40(a)(i)are

attracted. The AO then proceeded to hold that the payment in question

is Fee for Technical Services (FTS) as the assessee has made this

payment for rendering managerial or consultancy services by the non-

resident persons. The AO accordingly disallowed the said amount of Rs.

38,92,787/- U/s 40(a)(i)of the Act. The assessee challenged the action

of the AO before the ld. CIT(A) but could not succeed. The ld. CIT(A)

was of the view that there is no finding by any authority that the said

payment was not chargeable to tax under Income Tax Act.

as raised before the authorities below and submitted that the payment

of commission to non-resident is not chargeable to tax in India and

consequently the assessee was not liable to deduct tax on such amount.

Therefore, the provisions of Section 40(a)(i) of the Act cannot be

invoked in the case of the assessee. He has relied upon a series of

decisions and submitted that the courts have consistently held that the

payment of commission to non-resident is not liable to tax in India

when the non-resident has no P.E. in India. He has referred to the

ITA No. 158/JP/2019 Satyam Polyplast vs. DCIT

order of the ld. CIT(A) for the assessment year 2013-14 and submitted

that the ld. CIT(A) has deleted an identical disallowance made by the

AO by following decision of Hon’ble Delhi High Court in case of CIT vs.

EON Technologies (P) Ltd. 343 ITR 366 as well as the decision of

Mumbai Benches of the Tribunal in case of Armayesh Global vs. ACIT 51

SOT 564. The ld. AR has also relied upon the following decisions:- • CIT vs. Fluidtherm Technology (P) Ltd. (2015 Taxman.com 87 (Madras). • CIT vs. Faizan Shoes (P) Ltd. 367 ITR 155. • CIT vs. Gujarat Reclaim Rubber Products (P) Ltd. ( Mumbai High Court.) • CIT vs. Toshuku Ltd. 125 ITR 525(SC) • CIT vs. Sea Resources Ltd. (Bombay High Court) • ITO vs. Excel Chemical India Ltd. (Ahmedabad Bench). • ACIT vs. Pahilajrai Jaikishan (Mumbai Bench).

provisions of Section 195 of the Act the assessee is under obligation to

deduct tax at source for making the payment to non-resident. In case

the assessee was having the belief that the amount in question is not

chargeable to tax in India then the assessee would have applied for

such exemption U/s 195(2) of the Act. In the absence of such finding

the assessee has defaulted in making deducting of TDS and

ITA No. 158/JP/2019 Satyam Polyplast vs. DCIT

consequently the provisions of Section 40(a)(i)of the Act are attracted

in this case. He has relied upon the orders of the authorities below.

material on record. The assessee has paid commission to non-resident

persons against the service of procuring orders for the assessee. The

details of the commission paid by the assessee are as under:-

S. No. Name of Agent Address Commission 1. Mr. Claudio Haberl A/c AV. Sesquicentenario 4540 CP1613, 22,06,46,7.00 Buenos Aires, Argentina 2. Md. Habibur Rahman Kalibarl, Azizabad, Patharghata Barguna 3,31,442.00 3. Nadia Anwar hasan Ali AL-Shekh, Othman, Snafer Building 4,68,120.00 Yemen 4. Reinhard Bosse UND Geschaftskunden Ag, 7,10,060.00 Bahnhofstrabe 17,49525 Lengerich, Germany 5. Shamlan Naseer Ali Doha, Qatar, YEMEN 1,76,698.00 Total 38,92,787.00

The AO has disallowed the said amount U/s 40(a)(i)on the ground that

the assessee has not deducted the tax at source as required U/s 195(1)

of the Act. The AO has given much emphasis to explanation-II to

Section 195(1) of the Act. The AO also held that the payment in

question is Fee for Technical Services (FTS) because the non-residents

have rendered the service of managerial in the nature which falls in the

ambit of definition of Fee for Technical Services U/s 9a(1)(vii) of the

Act. It is pertinent to note that the provisions of Section 40(a)(i) can be

applied only respect of sum payable or paid to a non-resident towards 5

ITA No. 158/JP/2019 Satyam Polyplast vs. DCIT

interest, royalty or Fee for Technical Services (FTS) or other sum

chargeable under this Act which is payable to non-resident. For ready

reference we quote the provisions of Section 40(a)(i) of the act as

under:-

“chargeable under the head "Profits and gains of business or profession",— (a) in the case of any assessee—

42[(i)43 44any 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

(B) 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 45[on or before the due date specified in sub-section (1) of section 139] : 46[Provided that where in respect of any such sum, tax has been deducted in any subsequent year, or has been deducted during the previous year but paid after the due date specified in sub-section (1) of section 139, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid.]

Explanation.—For the purposes of this sub-clause,—

ITA No. 158/JP/2019 Satyam Polyplast vs. DCIT

(A) "royalty" shall have the same meaning as in Explanation2 to clause (vi) of sub-section (1) of section 9;

(B) "fees for technical services" shall have the same meaning as in Explanation2 to clause (vii) of sub- section (1) of section 9;”

The payment in question is commission and prima facie not royalty or

Fee for Technical Services (FTS). The AO though observed that the

payment in the nature of FTS, however the AO 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. We find that the ld. CIT(A) 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 ld. CIT(A) has upheld the order of the AO only on the

ground that as per the explanation-II of Section 195(1) of the Act the

assessee was under obligation to deduct the tax at source for making

the payment of commission to non-resident. Therefore, the ld. CIT(A)

has accepted the nature of payment as commission and not fee for

ITA No. 158/JP/2019 Satyam Polyplast vs. DCIT

technical service. The relevant finding of the ld. CIT(A) in para 4.3 as

under:-

“4.3 I have gone through the assessment order, statement of facts, grounds of appeal and written submissions carefully. It is seen that the AO after discussing the provisions of Section 195, including the Explanation 2, has concluded that the appellant was required to deduct the tax at source while making the payment of above referred expenses even, to the non-resident persons, whether or not the non-resident person had a residence or place of business or business connection in India or any other presence in any manner whatsoever in India. The explanation 2 has been inserted by the Finance Act of 2012 with retrospective effect from 01.04.1962. I am of the considered view that the argument of the appellant that since the non-resident persons whom the payments were made did not have place of business or business connection in India, therefore, the appellant was not required to deduct tax at source on the above referred payments, is not correct. Regarding the second argument of the appellant that the income of the recipients of the above referred expenses was not “sum chargeable under the provisions of income Tax Act, 1961 therefore the provisions of Section 195(1) are not applicable to these payments” the A/R of the appellant was specifically requested to clarify whether any ruling was obtained from the Authority for Advance Ruling u/s 245(2), regarding non taxability of the income of the recipient in India under the Income Tax Act. The A/R submitted that no such ruling was obtained from AAR by the recipients of the above referred expenses. There is no other evidence on record to show that the sum received by the non- residents in the form of selling commission (Rs. 38,92,787/-) was not chargeable to tax under the Income Tax Act. There is no order or finding by any Income Tax Authority that the above referred sum of Rs. 38,92,787/- was not chargeable to tax under I. T. Act, 1961. Therefore, I am of the considered view that the 8

ITA No. 158/JP/2019 Satyam Polyplast vs. DCIT

appellant was required to deduct tax at source while making payment of selling commission ( Rs. 38,92,787/-) to non-resident, whether or not the non-resident had a residence or place of business or business connection in India. The decision relied upon by the appellant are applicable only when there is evidence on record to show that the sum paid by the assessee was not chargeable to tax under the Income Tax Act. Therefore, disallowance of Rs. 38,92,787/- made by the AO is hereby confirmed.”

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:- “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.

ITA No. 158/JP/2019 Satyam Polyplast vs. DCIT

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 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

ITA No. 158/JP/2019 Satyam Polyplast vs. DCIT 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.

Order pronounced in the open court on 14/05/2019.

Sd/- Sd/- ¼ jes’k lh0 “kekZ ½ ¼fot; iky jko½ (Ramesh. C. Sharma) (Vijay Pal Rao) ys[kk lnL;@Accountant Member U;kf;d lnL;@Judicial Member Tk;iqj@Jaipur fnukad@Dated:- 14/05/2019. *Santosh. आदेश की प्रतिलिपि अग्रेf’ात@ब्वचल वf जीम वतकमत वितूंतकमक जवरू 1. vihykFkhZ@The Appellant- Satyam Polyplast, Jaipur. 2. izR;FkhZ@ The Respondent- DCIT, Circle-4, Jaipur. 3. vk;dj vk;qDr@ CIT 4. vk;dj vk;qDr@ CIT(A) 5. विभागीय प्रतिनिधि] आयकर अपीलीय अधिकरण] जयपुर@क्त्ए प्ज्Aज्ए Jंपचनत. 6. xkMZ QkbZy@ Guard File {ITA No. 158/JP/2019} vkns'kkuqlkj@ By order,

सहायक पंजीकार@Aेेज. त्महपेजतंत