SUBHASH CHAND GUPTA,JAIPUR vs. ACIT, ALWAR

आयकर अपीलीय अधिकरण] जयपुर न्यायपीठ] जयपुर IN THE INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCHES, JAIPUR Jh Hkkxpan] ys[kk lnL; ,oa Jh dqy Hkkjr] U;kf;d lnL; ds le{k BEFORE: SHRI BHAGCHAND, AM & SHRI KUL BHARAT, JM

vk;dj vihy la-@ITA No. 1122/JP/2016 fu/kZkj.k o"kZ@Assessment Year : 2013-14 cuke Subhash Chand Gupta, A.C.I.T., Vs. M/s R.K. Exports, Baba Shyam Circle-2, Colony, Shahpura, Jaipur- Alwar. 303103. LFkk;h ys[kk la-@thvkbZvkj la-@PAN/GIR No.: ABQPG 5724 L vihykFkhZ@Appellant izR;FkhZ@Respondent fu/kZkfjrh dh vksj ls@ Assessee by : Shri S.L. Poddar & Ms. Isha Kanoongo (Adv) jktLo dh vksj ls@ Revenue by : Shri R.A. Verma (Addl.CIT) lquokbZ dh rkjh[k@ Date of Hearing : 25/10/2017 mn?kks"k.kk dh rkjh[k@ Date of Pronouncement : 26/12/2017 vkns'k@ ORDER PER: BHAGCHAND, A.M. This is an appeal filed by the assessee emanates from the order of the ld. CIT(A), Alwar, dated 03/10/2016 for the A.Y. 2013-14.

ITA 1122/JP/2016_ 2 Subhash Chand Gupta Vs ACIT

completed U/s 143(3) of the Income Tax Act, 1961 (in short the Act) on

15/11/2011 determining the income of the assessee at Rs. 63,74,430/- by

making various additions. The ld. CIT(A) has confirmed the addition.

grounds of appeal:

“1. Under the facts and circumstances of the case, the ld CIT(A) has erred in sustaining the disallowance of Rs. 37,09,646/- U/s 40(a)(ia) of the Income Tax Act, 1961 without considering the submission of the assessee that the payment of commission was made to NRI.

confirming the disallowance of Rs. 37,09,646/- U/s 40(a)(ia) of the Act.

The ld CIT(A) has upheld the action of the Assessing Officer by holding as

under:

5.3 I have gone through the assessment order as well as submissions made by the appellant.

ITA 1122/JP/2016_ 3 Subhash Chand Gupta Vs ACIT

5.3.2 I have considered the above mentioned facts. The appellant has cited Hon’ble ITAT, Jaipur bench judgment in appellant’s own case for A.Y 2004- 05 to 2007-08, where on similar issue the Hon’ble ITAT had given relief to the assessee. However, it is important to note here that the Finance Act 2010 has inserted an explanation to the section 9(2) of the Act w.e.f. 01/04/1976 which is given below:

Explanation.—For the removal of doubts, it is hereby declared that for the purposes of this section, income of a non-resident shall be deemed to accrue or arise in India under clause (v) or clause (vi) or clause (vii) of sub-section (1) and shall be included in the total income of the nonresident, whether or not,—

(i) the business or business connection in India; or

(ii) the non-resident has rendered services in India.

ITA 1122/JP/2016_ 4 Subhash Chand Gupta Vs ACIT

In view of the explanation inserted in the section 9(2) with regard to NRI, the Hon’ble ITAT, Jaipur Bench Judgment in the appellant’s cases for prior years will not be applicable for year under consideration.

I have further considered the following points;

Fee for technical services(FTS) is defined in explanation 2 to section 9(1) (vii) of the Act to mean "any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under head "Salaries".

As per Article 12(a) of the DTAA, the term FTS means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel) if such services:

a) Are ancillary and subsidiary ....; or

b) Make available technical knowledge, experience, skill, know-how or processes or consists of the development and transfer of a technical plan or technical design.

Therefore, taking into account factual matrix of the case, it is my considered view that the A.O is justified in disallowing the payment as it had attracted provision of section 195 of the Act, which the appellant had failed to deduct tax at source. Accordingly, the disallowance of Rs. 37,09,646/ on account of commission paid for consultancy/managerial services under section 40(a)(ia) of the Act is sustained. Appellant’s ground of appeal is dismissed.”

ITA 1122/JP/2016_ 5 Subhash Chand Gupta Vs ACIT

as under:

The main issue involved in the said transaction is that whether sales commission paid to a non-resident person for the services in the foreign country i.e. outside India is taxable in India with regard to section 195 of the Act?

ITA 1122/JP/2016_ 6 Subhash Chand Gupta Vs ACIT

The Ld. AO has reject the assessee claim and disallowance of payment of sales commission to NRI without deducting TDS by taking a view that circular 7/2009 dated22-10-2009 (withdrawals of circular no.23 & 786 has been withdrawn by the CBDT) and treating the sales commission as fee for technical services (FTS) which was given for securing the export order outside India.

To resolve the above issue we have to first go through to the section 5" Scope of total income" & section 9 "Income deemed to accrue or arise in India" of the Act"

Section 5 (1) of the Act subject to the provisions of this Act, the total income of any previous year of a person who is a resident includes all income from whatever sources 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 of arise in India during such year ; or (c) Accrues or arise to him outside India during such year:

Provided that, in the case of a person not ordinarily resident in India within the meaning of sub section(6) of section 6, the income which accrues or arises to him outside India shall not be so included unless it is derived from a business controlled in or a profession set up in India.

(2) Subject to the provision of this Act, the total income of any previous year of a year who is a non resident includes all income from whatever sources 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 of arise to him in India during such year

ITA 1122/JP/2016_ 7 Subhash Chand Gupta Vs ACIT

Meaning thereby that if a NRI derives any income which is received or is deemed to be received in India OR any income which accrues or arises in India can only be liable to tax in India"

In case wherein the agent is operating in his own respective country and the commission was paid to him for procuring the export order for the assessee from outside India and the foreign agents had no business connection in India. In such a situation the commission paid to him is totally out of scope of section 5 of the Act and therefore, commission earned by him is not taxable in India.

Section 9 (I) (i) does not seek to bring in to the tax net the profits of a non - resident which cannot reasonably be attributed to operations carried out in India. It is only that portion of the profit which can reasonably be attributed to the operations of the business carried out in India which is liable to tax in India

In our case the assessee had paid commission to a non resident agent for rendering services in respect of procuring export orders from outside India. The commission paid to the non residents was towards services rendered by him in country outside India. The Assessee had not deducted tax at source while remitting the commission to the foreign agents since the agent was not having any business connection in India & commission earned by him is not taxable in India.

Provision of Section 195 of the Act are also not applicable in our case since it stipulates that - Any person responsible for paying to non - resident, not being a company, or to a foreign company, any interest (not being interest referred to in section 194LB or section 194LC or section 194LD) or any other sum chargeable under the provision of the is Act (not being income chargeable under the head "salaries") shall, at the time of

ITA 1122/JP/2016_ 8 Subhash Chand Gupta Vs ACIT

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 rate in force.

The provision of the said section can be elaborate as - that A person is liable to TDS only when the services are rendered within the territory of India or paid within India. In this regard we would like to submit as under: -

Facts of the case:

The assessee, a private limited company, manufactures and exports leather garments and incurred expenditure towards commission paid to non-residents for the purpose of procuring orders abroad. The A.O disallowed the same, by observing that section 9 of the Act applied in this case as the commission amount had accrued to a nonresident/ payee principally on account of a business activity in India which required TDS deduction. The Assessing Officer further held that the certificate under section 195(2) of the Act had also not been produced. Accordingly, he disallowed/added the commission amount in assessee's income.

The Appellate Tribunal held that:

ITA 1122/JP/2016_ 9 Subhash Chand Gupta Vs ACIT

The Revenue's only grievance is that the aforesaid foreign agency commission paid by the assessee to the non residents/payee attracts disallowance under section 40 (a)(i) for non deduction of TDS. It is made clear that in support of this plea, no cogent evidence has been produced. It transpires from the case file the assessee has paid foreign exchange commission to its non-resident agent who do not have any permanent establishment in India. There is no material to prove that these payment have arisen out of an agreement executed in India. Nor there is any evidence to conclude that the nonresident/payee has rendered any technical service to the assessee. The Revenue also fails to prove the payments to have been accrued, arisen or paid in India so as to make it taxable under provision of the Act.

Taking into consideration all these circumstances, CIT(A) held that the assessee was not liable to deduct TDS on above stated commission paid to its non-resident payees and which was subsequently confirmed by the Hon'ble ITAT. Therefore the issue in this appeal is squarely covered and the amendment made in section 9(2) of the Act retrospectively by the Finance Act, 2010 has also been considered and found not applicable in the case of the assessee.

Similar view was also expressed in the latest judgment of Madras High Court in the case of CIT Chennai v/s Farida Leather Company where in the decision of the recent case, reported in (2014) 369 I.T.R. 96 (Mad) (Commissioner of Income Tax v. Kikani Exports Pvt. Ltd.) was followed wherein the contention of the Revenue has been rejected and assessee has been upheld and the relevant observation reads as under:- "... the services rendered by the non-resident agent could at best be called as a service for completion of the export commitment and would not fall within the definition of "fees for technical services" and, therefore,

ITA 1122/JP/2016_ 10 Subhash Chand Gupta Vs ACIT

section 9 was not applicable and, consequently, section 195 did not come into play. Therefore, the disallowance made by the Assessing Officer towards export commission paid by the assessee to the non-resident was rightly deleted."

When the transaction does not attract the provisions of Section 9 of the Act, then there is no question of applying Explanation 4 to Section 9 of the Act. Therefore, the Revenue has no case and the Tax Case Appeal is liable to be dismissed.

Therefore the issue in present case is squarely covered by this decision.

The scope of Explanation 2 to section 9(l)(vii) of the Act by the Finance Act, 2010 was also examined by the Allahabad High Court in the case of CIT vs. Model Exims (358 ITR 2) which was followed by the Tribunal in the assessee's own case for the immediately preceding year. The relevant observations of the Tribunal are extracted hereunder for the sake of reference:- "The Id. counsel for the assessee has contended that this issue is covered by the order of the jurisdictional High Court and various orders of the Tribunal, particularly in the case of ACIT vs. M/s Model Exims, Kanpur in I.T.A. No. 697/LKW/2013 in the light of CBDT circular and amendments. We find that the view taken by the Tribunal has been approved by the Hon'ble High Court of Allahabad in the case of CIT vs. M/s Model Exims, 358 ITR 2 (Alld). "

The relevant observations of the Hon'ble High Court are extracted hereunder:-

"We find that all the questions as framed by the department are covered by our judgment in CIT v. M/s Model Exims, Kanpur, Income Tax Appeal (Def.) No.164 of 2011, decided in favour of the assessee and against the revenue on 10.09.2013 and die judgment in CIT, Kanpur v. M/s Allied

ITA 1122/JP/2016_ 11 Subhash Chand Gupta Vs ACIT

Exims, Income Tax Appeal No.313 of 2013 decided on 13.11.2013. In both these judgments we have held, that A.O. did not bring anything on record, which could demonstrate that non-resident agents were appointed as selling agents, designers or technical advisers. The payment of commission to foreign agents did not entitle such foreign agents to pay tax in India and thus the TDS was not liable to be deducted under Section 195 of the Act. The disallowance made by A.O. under Section 40 (a) (i) for non-deduction of tax at source under Section 195 were not justified."

This judgement was also followed by ITAT Lucknow Bench in the case of Northern Tannery case in ITA No. 636/LKW/2013 order dated 18 June 2015 copy of which is submitting here with. Therefore the addition so confirmed by the Learned. CIT Appeal deserves to be deleted.”

authorities below.

assessee has paid commission of Rs. 37,09,646/- to Salwa Mohammad

Abdul Rehman, Jeddah, Kingdom of Saudi Arabia and no TDS was

deducted. The lower authorities has sustained the disallowance of

payment of sales commission to an NRI without deducting TDS by taking a

view that circular has been withdrawn and treating the sales commission

as fee for technical services. It is pertinent to note that this commission

was given for procuring the export orders from outside India. Sourcing

orders abroad for which payment had been made directly to the

ITA 1122/JP/2016_ 12 Subhash Chand Gupta Vs ACIT

nonresident does not fall in the category of technical services and

transactions do not partakes the character of fee for technical services as

explained in Section 9(ii)(vii) of the Act. Thus the commission has been

paid for the services rendered outside the India. The person to whom the

commission paid was not having any business connection in the India and

commission so earned by him is not taxable in the India. Therefore, the

provisions of Section 195 of the Act are not applicable. The Hon’ble Madras

High Court in its order dated 20/1/2016 in Tax case Appeal No. 484 of

2015 has held as under:

“9. This question has been answered by the Hon'ble Supreme Court, in the case of G.E. India Technology Centre Pvt. Ltd. v. CIT (2010) 327 I.T.R. 456, in which, it is very categorically held that the tax deducted at source obligations under Section 195 (1) of the Act arises, only if the payment is chargeable to tax in the hands of the non-resident recipient.

9.1 Therefore, merely because a person has not deducted tax at source or a remittance abroad, it cannot be inferred that the person making the remittance, namely, the assessee, in the instant case, 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.

9.2 The underlying principle is that, the tax withholding liability of the payer is inherently a vicarious liability on behalf of the recipient and therefore, when the recipient/ foreign agent does not have the primary liability to be taxed in respect of income embedded in the receipt, the vicarious liability

ITA 1122/JP/2016_ 13 Subhash Chand Gupta Vs ACIT

of the payer to deduct tax does not arise. This vicarious tax withholding liability cannot be invoked, unless primary tax liability of the recipent/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.

ITA 1122/JP/2016_ 14 Subhash Chand Gupta Vs ACIT

technical services" as explained in the context of Section 9 (1) (vii) of the Act.

"... the services rendered by the non-resident agent could at best be called as a service for completion of the export commitment and would not fall within the ] definition of "fees for technical services" and, therefore, section 9 was not applicable and, consequently, section 195 did not come into play. Therefore, the disallowance made by the Assessing

ITA 1122/JP/2016_ 15 Subhash Chand Gupta Vs ACIT Officer towards export commission paid by the assessee to the non- resident was rightly deleted." 16. When the transaction does not attract the provisions of Section 9 of the Act, then there is no question of applying Explanation 4 to Section 9 of the Act. Therefore, the Revenue has no case and the Tax Case Appeal is liable to be dismissed.

Considering the decision of the Hon’ble Madras High Court and the also

the factual aspect of the case, we allow the appeal of the assessee.”

Order pronounced in the open court on 26/12/2017.

Sd/- Sd/- ¼dqy Hkkjr½ ¼Hkkxpan½ (Kul Bharat) (BHAGCHAND) U;kf;d lnL;@Judicial Member ys[kk lnL;@Accountant Member Tk;iqj@Jaipur fnukad@Dated:- 26th December, 2017 *Ranjan आदेश की प्रतिलिपि अग्रेf’ात@ब्वचल वf जीम वतकमत वितूंतकमक जवरू vihykFkhZ@The Appellant- Shri Subhash Chand Gupta, Jaipur. 1. izR;FkhZ@ The Respondent- The A.C.I.T., Circle-2, Alwar. 2. vk;dj vk;qDr@ CIT 3. vk;dj vk;qDr¼vihy½@The CIT(A) 4. विभागीय प्रतिनिधि] आयकर अपीलीय अधिकरण] जयपुर@क्त्ए प्ज्Aज्ए Jंपचनत 5. xkMZ QkbZy@ Guard File (ITA No. 1122/JP/2016) 6.

vkns'kkuqlkj@ By order, सहायक पंजीकार@Aेेज. त्महपेजतंत