ANANTH TECHNOLOGIES LIMITED.,HYDERABAD. vs. DY. COMMISSIONER OF INCOME TAX, CIRCLE-1(1)., HYDERABAD.

PER B. RAMAKOTAIAH, A.M. :

This is an appeal by assessee against the order of Commissioner of Income Tax (Appeals)-1, Hyderabad dated 30-05-2017. The issue in this appeal is with reference to disallowance u/s. 40(a)(i) of the Income Tax Act [Act] made on the reason that TDS was not made on the commission paid to foreign entity for the services rendered abroad.

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digital systems, has entered into an agreement with M/s. TM India LLC, Houston as its collection agent for following up with its customers for procurement of orders and recovery of amount. An amount of Rs. 13,73,133/- was paid to the said concern which was claimed as an expenditure in the P&L A/c. AO has asked assessee to explain why TDS was not affected on these payments. Assessee submitted that the said agent has rendered services abroad only and has not rendered any technical or other services and the agent has no permanent establishment in India, being a non-resident and having covered by DTAA India and USA. The commission paid to the said agent for the services rendered outside India are not taxable in India as per the provisions of Section 9 and hence no TDS is required to be deducted. AO, however, contended that as per the provisions of Section 9(1)(i) of the Act, income accruing or arising directly or indirectly through or from any business connection in India or source of income in India shall be deemed to accrue or arise in India. AO relied on the decision of the Authority for Advance Ruling (AAR) in the case of SKF Boilers and Driers (P.) Ltd., in AAR Nos. 983 & 984 of 2010 [343 ITR 385] to conclude that the commission paid to foreign agent is deemed to accrue or arise in India and accordingly, the provisions of Section 195 are applicable. As assessee has failed to deduct tax, AO was of the opinion that the same is disallowable u/s. 40(a)(i).

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following up with its customers for procurement of orders and recovery of amounts abroad. It was submitted that the agent has no permanent establishment in India and since the provisions of Section 9 are not applicable, there is no requirement of TDS to be made. Assessee relied on the judgment in the case of M/s. GE India Technology Centre (P) Ltd., Vs. CIT [327 ITR 456] (SC). However, Ld.CIT(A) took an altogether different stand and rejected the contentions of assessee by stating as under:

“5.4. Appellant had entered into an agreement with TM India LLC, Texas to pay a commission. However, this document is not registered or on a stamp paper. The TM India LLC is a company based in Houston, Texas, USA and the management of this company includes: a) Dr. Subba Rao Pavuluri, MD of M/s. Ananth Technologies Limited b) Sri Trevor Gosney, Managing Partner of TM India LLC is responsible for the day-to-day business of the Alliance. c) Sri Mike Garodia, Development Director of TM India based in Oregon and Calcutta manages the liaison between the alliance partners. He is also the President of M/s. Magna Commercial, an international trading consultancy company.

TM India LLC was established in Houston, Texas, USA in 2006 to provide engineering support services with its Alliance Partner, M/s.Ananth Technology Ltd of Hyderabad, India. That is to say that the company has subsidiary in USA managed by Dr. Subba Rao Pavuluri who is MD of both the companies. Since the other two partners are indulged in managing the liaison and day-to-day business of the alliance partners. Hence, it is clear that M/s. TM India LLC is not a separate entity but it is a subsidiary of the appellant company. Hence the commission paid to M/s. TM India LLC, USA of Rs.13,73,133/- is liable to deduct tax as per the Provisions of section 195. However, the commission paid to the foreign agent by it is deemed to accrue or arise in India, is taxable and so the provisions of the Section 195 is applicable. In view of the above, I uphold the addition made by the Assessing Officer”.

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Boilers and Driers (P.) Ltd., (supra) to submit that Section 5 and 9 proceed on the assumption that income has a situs and the situs has to be determined according to the general principles of law. It was also submitted that the fact that the agents for rendered services abroad in the form of soliciting the orders and the commission is to be remitted to them abroad are wholly irrelevant for the purpose of determining the situs of the income. It was submitted that the provisions of Section 195 would apply and accordingly the disallowance u/s. 40(a)(i) are validly made by the AO.

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High Court also held that following the principles laid down by the Hon'ble Supreme Court in the case of CIT Vs. Toshoku Ltd., [125 ITR 525] (SC) that making up of the entries in the books of account of assessee cannot be taken into be receipt actual or constructive by the non-resident sales agents. In view of that, prima-facie, the amounts paid from India does not establish that income has accrued or arisen in India as the services are not rendered in India at all and assessee has no business connection. This issue was considered by the Co- ordinate Bench in the case of DCIT Vs. Divi’s Laboratories Ltd., [131 ITD 271], wherein it was held as under:

“The main thrust in such a situation is whether the commission made to overseas agents, who are non-resident entities, and who render services only at such particular place, is assessable to tax. Sec. 195 very clearly speaks that unless the income is liable to be taxed in India, there is no obligation to deduct tax. Now, in order to determine whether the income could be deemed to be accrued or arisen In India, s. 9 is the basis. This section does not provide scope for taxing such payment because the basic criteria provided in the section is about genesis or accruing or arising in India, by virtue of connection with the property in India, control and management vested in India, which are not satisfied in the present cases. Under these circumstances, withdrawal of earlier circulars issued by the CBDT has no assistance to the Department, in any way, in disallowing such expenditure. It appears that an overseas agent of an Indian exporter operates in his own country and no part of his income arises in India and his commission is usually remitted directly to him by way of TT or posting of cheques/demand drafts in India and therefore the same is not received by him or on his behalf in India and such an overseas agent is not liable to income-tax in India on these commission payments. It is pertinent to note that s. 195 has to be read along with the charging ss. 4, 5 and 9. One should not read s. 195 to mean that the moment there is a remittance, the obligation to TDS automatically arises. If the contention of the Department is to be taken as correct, that any person making payment to a non-resident is necessarily required to deduct tax, then the consequence would be that the Department would be entitled to appropriate the monies deposited by the payer even if the sum paid is not chargeable to tax because there

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is no provision in the IT Act by which a payer can obtain refund. As per s. 237 r/w s. 199 only the recipient of the sum i.e., payee would seek a refund. In view of the above, hence, no tax is deductible under s. 195 on commission payments and consequently the expenditure on export commission payable to non-resident for services rendered outside India becomes allowable expenditure and the same is outside rigours of the s. 40a(ia). The requirement of services of the non- resident being rendered in India and being utilized in India is still valid, despite withdrawal of earlier circulars issued on this subject by CBDT.—CIT vs. Toshoku Ltd. (1980) 19 CTR (SC) 192 : (1980) 125 ITR 525 (SC) and GE India Technology Centre (P) Ltd. vs. CIT & Anr. (2010) 234 CTR (SC) 153 : (2010) 44 DTR (SC) 201 : (2010) 327 ITR 456 (SC) relied on”.

7.1. Similarly in the case of Euroflex Transmissions (India) Pvt. Ltd., Vs. ACIT in ITA No. 1773/Hyd/2014, dt. 01- 04-2015, on similar issue the Co-ordinate Bench has held as under:

“7. We have considered the submissions of the parties and perused the orders of the revenue authorities as well as other materials on record. We have also carefully applied our mind to the decisions cited at the bar. On a perusal of the assessment order, it is very much evident that AO has not disputed the fact that commission payments were made to non-resident agents who not only were carrying on their business activities outside India, but, the commission payments were also related to services provided by those agents outside India. It is also not disputed that none of the commission agents have any permanent establishment or permanent business place in India. AO has also not disputed the fact that commission amounts were remitted to non- residents directly outside India. However, AO has held that assessee is liable to deduct tax u/s 195(1) on the reasoning that as per the decisions of the AAR, referred to by him, income is deemed to accrue or arise in India when right to receive it comes into existence. Ld. CIT(A) has confirmed the view expressed by AO without assigning any reason of his own. It is to be noted that incase of Rajeev Malhotra(supra), AAR has come to its conclusion by referring to the provisions contained u/s 6 and 9 of the IT Act. However, a careful reading of section 9 of the Act would make it clear that under Explanation 1(a) to section 9(1), it has been provided that in

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case of a business of which all the operations are not carried out in India, the income of such business only relating to such part of the income as is reasonably attributable to the operations carried out in India shall be deemed to accrue or arise in India. In the present case, AO has not brought any material on record to establish that non-resident agents have carried out any part of their business in India.

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2003 and 2004-2005 in ITA.No.415 & 999/Hyd/2007 by order dated 25.06.2010. the Coordinate Bench has held as under : "2. . . .. . We find that as per Circular 786 dated 17.2.2000, commission paid by the assessee company directly to non-resident agents for rendering services abroad are not liable for deduction of TDS under section 195 of the Act. Accordingly, the provisions of section 40(a)(ia) of the Act are not applicable. The case law relied on by the learned Departmental Representative in the case of Transmission Corporation of A.P. Limited reported in 239 ITR 587 (SC) and the decision of this Tribunal in the case of Cheminor Drugs vs. ITO is not applicable to the facts of the case under consideration, as in this case, the assessee made the payment directly to the non-resident agents for rendering services abroad. In view of the above, we do not see any infirmity in the order of the CIT(A) on this issue and the same is upheld."

7.2. The ratio laid down by the Co-ordinate Benches squarely applies to the facts of the present case and respectfully following the principles laid down in the judicial proceedings referred to herein above, we therefore hold that the provisions of Section 195 would not be applicable to the commission payments made by assessee to non-resident agent who has not done any service in India and as such income is not chargeable to tax under the provisions of the Act as there is no requirement to do any TDS u/s. 195, the disallowance made u/s. 40(a)(i) of the Act is also not survive.

7.3. We are surprised to note that Ld.CIT(A) without understanding the international law has simply held that a foreign agent and the Indian company are sister concerns and accordingly the amounts are taxable. Even if one were to consider that other company is a sister concern of assessee, how the provisions of Section 195 or Section 5 and Section 9 are applicable has not been discussed by the Ld.CIT(A) at all.

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Moreover, the provisions of DTAA between India and USA also gives the right to tax the amount in the hands of foreign assessee if the same is considered as business income when there is no permanent establishment in India. Since the non- resident has no permanent establishment in India, the question of taxing the amount does not arise as the provisions of DTAA which over rides the provisions of Income Tax Act. In view of that, the order of CIT(A) cannot be upheld. Similar view was also expressed by the Co-ordinate Bench in the case of Dy.CIT Vs. M/s. Linkwell Telesystems (P.) Ltd., wherein also commission was paid to non-residents for the services rendered abroad and was held not taxable. In view of that, we cannot uphold the orders of AO disallowing the amount u/s. 40(a)(i). Grounds raised by assessee are allowed.

Order pronounced in the open court on 20th July, 2018

Sd/- Sd/- (CHALLA NAGENDRA PRASAD) (B. RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEMBER Hyderabad, Dated 20th July, 2018 TNMM

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Copy to : 1. M/s. Ananth Technologies Limited, C/o. A.V. Raghu Ram, P. Vinod & M. Neelima Devi, Advocates, 610, Babukhan Estate, Basheerbagh, Hyderabad. 2. The Dy.CIT, Circle-1(1), Hyderabad.