DCIT 8(2)(1), MUMBAI vs. SHAMROCK PHARMACHEMI P. LTD., MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL (VIRTUAL COURT), ”G” BENCH, MUMBAI BEFORE SHRI SAKTIJIT DEY, JUDICIAL MEMBER & SHRI M.BALAGANESH, ACCOUNTANT MEMBER ITA Nos. 862 & 863/Mum/2018 (Assessment Years :2013-14 & 2014-15) DCIT-8(2)(1) Vs. M/s. Shamrock Pharmachemi Room No.624, Pvt.Ltd. Aaykar Bhawan, M.K.Road Off Dr. E Moses Road Mumbai-400 020 Worli, Mumbai-400 025 PAN/GIR No.AAACS6290H (Appellant) .. (Respondent) Assessee by Shri Bharat Gandhi, AR Revenue by Shri V.Vinod Kumar, Sr.AR Date of Hearing 28/10/2020 Date of Pronouncement 11/11/2020 आदेश / O R D E R PER M. BALAGANESH (A.M): These two appeals filed by revenue in ITA Nos. 862 & 863/Mum/2018 for Assessment Years (AY) 2013-14 & 2014-15 arise out of the order by the ld. Commissioner of Income Tax (Appeals)- 14, Mumbai in appeals No.CIT(A)-14/IT-170/15-16 & CIT(A)-14/IT- 119/16-17, dated 27/11/2017 (ld. CIT(A) in short) against the order of assessment passed u/s.143(3) of the Income Tax Act, 1961 (hereinafter referred to as Act) dated 31/08/2016 by the ld. Deputy Commissioner of Income Tax-8(2)(1), Mumbai (hereinafter referred to as ld. AO).

2 ITA No.862 & 863/Mum/2018 M/s. Shamrock Pharmachemi Pvt.Ltd. for the sake of convenience. With the consent of both the parties, the appeal for the AY 2013-14 is taken as the lead case and the decision rendered thereon would apply with equal force for AY 2014- 15 also, except with variance in figures.

3 ITA No.862 & 863/Mum/2018 M/s. Shamrock Pharmachemi Pvt.Ltd. the payment of commission made to non-resident agents is not chargeable to tax in India in terms of section 195 of the Act and hence, there is no requirement to deduct tax at source as no part of income arises in India in the hands of the said non-resident agent. The Ld.CIT(A) also placed reliance on the CBDT circular No. 786, dated 07/02/2000 and on various decisions in support of his contentions.

Sr.No. Name of the Agent Country 1 NJK holdings LLC USA 2 Sandrine Corporation USA 3 World Avenues Ltd UK

The Ld. CIT(A) categorically held that since the sum is not chargeable to tax in India u/s 195(1) of the Act in the hands of the non-resident agents. Hence there is no liability to deduct tax at source in the hands of the assesee payer. The Ld.CIT(A) also held that once the sum paid is not chargeable to tax under the provisions of the Act, there cannot be any liability to deduct tax at source and consequentially, there is no requirement for the assessee to make an application u/s 195(2) of the Act seeking either for lower deduction certificate or nil deduction certificate from the ld. AO. The Ld. CIT(A) also placed reliance on the decision of Hon’ble Supreme Court in the case of GE India Technology Center Pvt.Ltd. vs CIT

4 ITA No.862 & 863/Mum/2018 M/s. Shamrock Pharmachemi Pvt.Ltd. reported in 327 ITR 456(SC) in support of his contentions apart from the following decisions:- (a) Decision of Hon‘ble Supreme Court in the case of CIT vs Toshoku Ltd reported in 125 ITR 525 (b) (b) decision of Hon‘ble jurisdictional High Court in the case of Gujarat reclaim and rubber products pvt Ltd. Reported in 383 ITR 236 (Bom) (c) Decision of Hon‘ble le Delhi High Court in the case of CIT vs Angelique international limited reported in 359 ITR 9 (delhi) (d) Decision of Hon‘ble Rajasthan High Court in the case of CIT vs Modern Insulators Ltd reported in 369 ITR 138 (e) Decision of Hon‘ble Madras High Court in the case of CIT vs Orient express reported in 330 taxmann.com 602 (f) Decision of Hon‘ble Madras High Court in the case of CIT vs Farida Leather company reported in 238 taxmann.com 473 (g) Decision of co-ordinate bench of this Tribunal in the case of ACIT vs Pahilajarai Jaikishan reprted in 157 ITD 1187 (Mum Trib.) 6. It is not in dispute that the non-resident agents to whom commission was paid by the assessee have rendered services outside India for sale of the goods of the assessee outside India. It is not in dispute that the said non-resident agents do not have any PE in India and that they are domiciled in U.K and USA. In view of these facts, it could be safely concluded that there is no income chargeable to tax in India in terms of section 195(1) of the Act in the hands of the non-resident agents and accordingly, the provisions of section 195(2) of the Act would not come into operation at all. Reliance in this regard had been rightly placed by the Ld. CIT(A) on the decision of Hon’ble Apex Court in the case of GE Technology Center Pvt.Ltd. in 327 ITR 456 (supra), wherein the head notes of the said decisions are reproduced hereunder:-

― Section 195 of the Income-tax Act, 1961 - Deduction of tax at source - Payment to non-resident -the moment a remittance is made to a non- resident, obligation to deduct tax at source does arise; it arises only when such remittance is a sum chargeable under Act, i.e., chargeable under 4,

5 ITA No.862 & 863/Mum/2018 M/s. Shamrock Pharmachemi Pvt.Ltd. 5 and 9 - Held, yes - Whether section 195(2) is not a mere provision to provide information ITO(TDS) so that department can keep track of remittances being made to non-residents outside rather it gets attracted to cases where payment made is a composite payment in which certain proportion of payment has an element of 'income' chargeable to tax in India and payer seeks a determination of appropriate proportion of sum chargeable - Held, yes‖

The assessee had duly submitted copies of agency agreement/contract and exclusivity agreement pertaining to 4 major overseas agents based in USA & Europe as well copies of ledger account of these agents. The four foreign agents to whom aforesaid payment of commission of Rs. 1.68 crore were made are as under:

6 ITA No.862 & 863/Mum/2018 M/s. Shamrock Pharmachemi Pvt.Ltd.

Sr. No. Name of the company Name of the country 1 Regal Rank Ltd UK 2 SRK Pharmachemie . Germany (Europe) GmBH 3 NJK Holdings LLC , USA 4 Roscio Alassandro Italy

The Revenue is not doubting the genuineness of these commissions to overseas agents which was claimed by assessee as business expenses u/s 37(1) as that part of appellate order holding the issue in favour of the assessee has attained finality as Revenue has not challenged the said part of finding of learned CIT(A). The Revenue is mainly aggrieved in this appeal by infringement of Section 195(2) read with Section 40(a)(i) of the 1961 Act. It is also explained by the assessee that it is into exports of pharmaceutical products and intermediaries due to which it has to incur high cost of registration involved for registering itself in foreign countries being new company abroad. The assessee submitted that from first and second year, marketing and promotional expenses on export sales are also to be incurred. It was also claimed by assessee that in these registration costs, the sales and marketing costs which are higher in initial years is to be taken care of by the agents. It was submitted that in first and second year, the price realisation of the products are also higher compared to subsequent years. Thus, it was submitted that higher commissions in the range of 12-15% are required to be paid to agents in the first and second year. As detailed in the chart produced above , the percentile of commission payable on the export orders came down significantly in succeeding assessment years . The assessee also submitted that it is importing raw materials and intermediates directly from MNCs and their representative in USA, Germany etc.. It was submitted that these MNC‗s due to their internal policies sell their products to their agents or traders and received advance payments against sales. The assessee submitted that it did not give substantial advance payments to the suppliers for importing the produces for which it involved services of the traders and agents who took care of the same and also arrange for supplies of the raw material directly from these companies. It was submitted that these agents and traders charge their commission as the overseas MNC companies as matter of their policy do not give them commission. The assessee submitted that these commission or agency charges includes expenses incurred by the overseas agents which included registration , vendor approval, quality approval, technical documentation, local analysis etc., which is maximum in the first year as all the registration and formalities have to be undertaken. It was submitted that prices or value generated is also on higher side in the first year in order to cover up the expenses mentioned above. The assessee submitted that these commission or agency charges also included out of pocket expenses which is the responsibility of the overseas agents to be incurred by them. It was also submitted that these

7 ITA No.862 & 863/Mum/2018 M/s. Shamrock Pharmachemi Pvt.Ltd. overseas commission were paid to overseas agents only after completion of registration and other formalities and achievement of sales target in terms of value and volume . The authorities below have perused the agency agreements. It is provided in the agreements that targets as to value and volumes are fixed for overseas agents to get commission and in case the performances are not forthcoming, the assessee will not be liable to pay these commissions. Thus, these commissions paid to overseas agents are linked to performance by way of export orders generated or import of raw material etc facilitated for the assessee. The assessee was new to export business and as this being the first year of exports , hence the assessee was required to get registration done with various authorities/agencies in foreign countries . The said overseas agents assisted assessee in getting itself registered and undertook work for marketing and sales of assessee‗s products for which necessarily expenses were incurred by these overseas agents but the pith and substance of the agency agreement and the work performed in substance was to generate export orders and to facilitate imports of the products dealt in by the assessee and the work of registration of the assessee with various authorities/agencies in foreign country or to undertake marketing and sales promotion was all incidental to generating export orders or facilitating imports for the assessee. The commission certainly was higher in the initial years due to requirements of getting assessee registered with various authorities/ agencies in foreign countries but the liability of the assessee to pay the said costs were linked to performance achieved by these overseas agents in generating export orders or facilitating import for the assessee. Thus, what is relevant is pith and substance of the transaction which clearly establishes the generation of export orders in favour of the assessee or facilitating imports for the assessee, while all the other activities undertaken by these agents were incidental to the main activity of export/import orders. It is not brought on record by Revenue that these agents had permanent establishment or any fixed place of business in India and as per material on record these non resident foreign agents were rendering services to assessee from outside India.The payments are also made by the assessee to these foreign agents by sending remittance abroad and no part of payment is made in India or to any person in India on behalf of these overseas agents. It is not brought on record by Revenue as to how this income earned by way of commission by these overseas agents is taxable in India , even under the deeming fiction of Section 9 of the 1961 Act . The only contention of the Revenue is that keeping in view newly amended provisions of Section 195(2) of the 1961 Act, the assessee was required to make an application to the AO for seeking permission for lower deduction of income-tax at source or for no deduction of income tax at source u/s 195 which was not done by the assessee. Admittedly , the assessee while making payments to these overseas agents towards commissions did not deducted income-tax at source under the provisions of Section 195 of the 1961 Act but it is a matter of record that the assessee did produce certified Form No. 15CA/15CB before AO during assessment proceedings wherein it is certified by CA that no sum so paid by assessee towards commission to these overseas agents is liable to be taxed under provisions of the 1961 Act. the Revenue could not controvert this position. It is important at this stage to refer to decision of Hon‗ble Madras

8 ITA No.862 & 863/Mum/2018 M/s. Shamrock Pharmachemi Pvt.Ltd. High Court in the case of Evolv Clothing Company Private Limited v. ACIT reported in (2018) 407 ITR 72(Mad.), wherein it was held as under: ―

9 ITA No.862 & 863/Mum/2018 M/s. Shamrock Pharmachemi Pvt.Ltd.

10 ITA No.862 & 863/Mum/2018 M/s. Shamrock Pharmachemi Pvt.Ltd. payments made by the appellant assessee could not be said to have been made for the purpose of overseas commission. The Assessing Officer as also the learned Tribunal misinterpreted the Explanation 2 of Section 9(1)(vii) of the IT Act, whereunder "fee for technical services" means any managerial, technical or consultancy services. It is nobody's case that the service rendered by the overseas agent was either managerial or technical. As held by the Appellate Commissioner, payment for research with regard to need for products was incidental to the job of procuring orders on commission basis. Consultancy services contemplate comprehensive expert technical advisory services based on technical expertise and research, of business and marketing strategies as a whole, including adoption of cost effective measures, organizational and infrastructural requirements, business management, personnel management and other strategies, for business efficacy of a business entity as a whole and not mere market survey of the need for any particular product. The amendment with retrospective effect from 1.6.1976 by insertion of Explanation to Section 9(2) can only apply to income by way of interest, by way of royalty and by way of fees for technical services and not to brokerage or job wise commission on activities incidental to procurement of orders. 27. The Assessing Officer, in effect, held that income could be deemed to accrue or arise in India under Section 9(1)(vii) of the IT Act even if the non- resident did not have place of business or business connection in India or had not rendered services in India. The exceptions provided under Section 9(1)(vi)(b)/9(1)(vii)(b) of the IT Act, which apply to utilization of services of business outside India, did not cover the assessee's case. 28. The Assessing Officer had also taken note of withdrawal of two circulars: (i) Circular No.786, dated 7.2.2000, dealing with payment of export commission, opining that withdrawal, being procedural in nature, would apply to proceedings pending; and (ii) Circular No.23 of 1969, which exhaustively dealt with subject of "Non residents Income accruing or arising through or from business connection in India – Liability to tax – Section 9 of the Income Tax Act, 1961". 29. From the Service Agreement with the agents abroad, it is clear that the service rendered is essentially brokerage service. The very first clause of the agreement states "to procure orders". The reference to market research abroad or co-ordination with the supplier or to ensure timely payment or making available its office space for visit by the suppliers, were ordinarily things which any agent or broker undertook incidental to brokerage service. 30. There is no finding that any of the commission agents had any place of business in India. Explanation 1 to Section 9(1)(i) of the IT Act would attract liability to Indian tax for a non-resident with business connections in India, only in respect of income attributable to his operations in India. In this case, there is nothing which shows that the income in question was attributable to operations in India. That was not even the factual finding of the Assessing Officer. The Assessing Officer proceeded on the basis that the situs of the rendering of services was not relevant. It was only the situs of the payer and

11 ITA No.862 & 863/Mum/2018 M/s. Shamrock Pharmachemi Pvt.Ltd. the situs of the utilization of services which determine taxability of such services in India. 31. Section 195 of the IT Act attracts tax only on chargeable income, if any, paid to a non-resident. Where there is no liability, the question of tax deduction does not arise. Where no part of the income is chargeable in India, even clearance under Section 195(2) or 195(3) of the IT Act is not necessary. The decision of the Karnataka High Court in CIT (International Taxation) v. Samsung Electronics Co. Ltd., [2010] 320 ITR 209/[2009] 185 Taxman 313 (Kar), has been overruled by the Supreme Court in GE India Technology Centre (P.) Ltd. v. CIT [2010] 327 ITR 456/193 Taxman 234/7 taxmann.com 18. The Supreme Court held as under: "This reasoning flows from the words 'sum chargeable under the provisions of the Act' in Section 195(1). The fact that the Revenue had not obtained any information per se cannot be a ground to construe Section 195 widely so as to require deduction of TAS even in a case where an amount paid is not chargeable to tax in India at all. We cannot read Section 195, as suggested by the Department, namely, that the moment there is remittance the obligation to deduct TAS arises. If we were to accept such a contention it would mean that on mere payment income would be said to arise or accrue in India. Therefore, as stated earlier, if the contention of the Department was accepted it would mean obliteration of the expression "sum chargeable under the provisions of the Act" from Section 195(1)." 32. Where there is no liability in India, there can be no question of disallowance under Section 40(a)(i) or Section 40(a)(ia) of the IT Act on the ground of non-deduction of tax at source. Moreover, where a non-resident has no permanent establishment in India, there can be no liability either under the domestic law or under Double Taxation Avoidance Agreement. In any case, even if a non-resident Indian did have a permanent establishment, but income was earned without availing of such permanent establishment, the income for services rendered abroad could not have been liable for tax deduction at source. 33. Under Section 9(1)(vii)(b), income by way of fees for technical services payable by a person, who is a resident, is taxable income except where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India. In view of Explanation (2) to Section 9(1)(vii), technical services means any consideration, including lumpsum consideration, for 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. Service of market survey only to ascertain the demand for the product in the market is incidental to the function of a commission agent of procuring orders and is, in any case, not managerial, technical or consultancy service. 34. In GE India Technology Centre P. Ltd., supra, the Supreme Court clearly held that no tax is deductible under Section 195 of the IT Act on commission

12 ITA No.862 & 863/Mum/2018 M/s. Shamrock Pharmachemi Pvt.Ltd. payments and consequently the expenditure on export commission payable to non-residents for services rendered outside India becomes allowable expenditure. In Toshoku Ltd., supra, the Supreme Court held that payments to agents for performance of services outside India are not liable to be taxed in India. 35. In CIT v. EON Technology (P.) Ltd. [2011] 15 Taxmann.com 391/203 Taxman 266/[2012] 343 ITR 366 (Delhi), the High Court of Delhi held that payment of sales commission to non-resident who operates outside the country would not attract tax, if payment was remitted abroad directly. Merely because an entry had been made in the books of accounts of the appellant/assessee, that would not mean that the non-resident agent had received payment in India and, therefore, disallowance under Section 40(a)(i) of the IT Act was found uncalled for. 36. The expression "fees for technical services" has been defined in Explanation (2) of Section 9(1)(vii) of the Income Tax Act to mean any consideration (including any lumpsum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personal) 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 the head salaries. Explanation (B) to Section 40(a)(i) provides that the expression "fees for technical services" in Section 40(a)(i) shall have the same meaning as in Explanation 2 to Clause (vii) of sub- section (1) of Section 9. 37. On a reading of Explanation (2) to Section 9(1)(vii), fees for technical services means consideration, including lumpsum consideration for rendering any managerial, technical or consultancy services. 38. In the instant case, the Assessing Officer has, in the assessment order, accepted that the appellant assessee has paid commission charges to overseas agents. It is not the case of the Assessing Officer that any lumpsum consideration has been made for any specific managerial, technical or consultancy services. 39. On a overall reading of the Explanation, it is apparent that fees for technical services does not contemplate commission which is order specific and computable at a small percentage of the order value. Section 40(a)(i) does not contemplate order wise commission based on the order value. 40. For the reasons discussed above, the appeal is allowed and the questions framed are answered in favour of the assessee against the Revenue. No costs. Consequently, connected miscellaneous petition is closed. The aforesaid is the decision of Hon‗ble Madras High Court in the case of Evolv Clothing Company Private Limited(supra) for AY 2009-10 wherein the Hon‗ble Madras High Court has referred to decision of Hon‗ble Supreme Court in the case of GE Technology Centre Private Limited v. CIT (2010) 327

13 ITA No.862 & 863/Mum/2018 M/s. Shamrock Pharmachemi Pvt.Ltd. ITR 456(SC) , wherein Hon‗ble Supreme Court held that what is relevant is the sum chargeable to income-tax under the provisions of the 1961 Act before provisions for deduction of income-tax at source u/s 195 come into service. Thus merely because the assessee has not made an application u/s 195(2), it will not bring the said sum chargeable to income-tax which otherwise is not chargeable to income-tax within provisions of the 1961 Act and provisions of Section 40(a)(i) cannot be invoked to disallow the expenses. The assessee in any case has produced before the AO form no. 15CA and 15CB certified by CA that no income tax was required to be deducted on these commissions paid to overseas agents and it is not shown by the AO as to how the said sum is chargeable to incometax within provisions of the 1961 Act . The taxes can be levied and collected only under authority of law (Art. 265 of Constitution of India). It is for the Revenue to show that as to how the said sum is chargeable to income-tax under the provisions of the 1961 Act. Secondly, Hon‗ble Madras High Court has also in aforesaid case after perusing the agreements held that marketing research abroad or coordination with suppliers were ordinary things which any agent or broker undertook which is incidental to brokerage services and the same were not held to be technical services. The overseas agents in the instant case before us have rendered assistance in getting assessee registered with various authorities and agencies in foreign country as well undertook marketing and sales services which were all incidental to agency business of generating export orders or facilitating imports for the assessee undertook by an agent in foreign country. It is not shown by Revenue that the assessee has made payment separately to these overseas agents towards getting itself registered with authorities/agencies abroad or for getting sales and marketing promotion done for the assessee. These overseas agents are based in foreign countries and have no PE / fixed place of business in India, as there is no material to contrary on record. These agents were not shown by Revenue to be working from India. It is also not shown by Revenue that lumpsum payments were made to these overseas agents but instead these payments were linked to the targets in terms of value and volume of export orders generated or imports facilitated by these overseas agents for the assessee.These overseas agents were not paid commission in India and payments were remitted abroad by assessee from India through banking channel and in case of two overseas agents it is stated that payments were not made by year end. Attention is also drawn to recent decision of Hon‗ble Gujarat High Court in the case of PCIT v. Ferromatic Milacron India Private Limited (2018) 99 taxmann.com 154(Guj.) , wherein Hon‗ble Gujarat High Court held that on payments made to overseas agents towards commission for export orders will not entail deduction of income-tax at source u/s 195 and no disallowance u/s 40(a)(i) is warranted by holding, as under: ―Revenue is in appeal against the judgment of the Income Tax Appellate Tribunal dated 19.04.2018 raising following questions for our consideration: "A. Whether the Appellate Tribunal had erred in law and on facts in upholding the order of the CIT(A) deleting the addition made on account of disallowance u/s. 40(a)(ia) of the Act for non deduction of tax on commission payable to foreign agents of Rs. 1,20,72,972/-? B. *** "

14 ITA No.862 & 863/Mum/2018 M/s. Shamrock Pharmachemi Pvt.Ltd. 2. Question A pertains to disallowance made by the Assessing Officer under section 40(a)(ia) of the Income-tax Act, 1961 ['the Act' for short] for the failure of the assessee to deduct tax at source on exemption paid to foreign agents. This issue has been considered in Tax Appeal No. 1232 of 2018 in following manner: "1. The issue arises in relation to assessment year 2011-12. During the course of assessment proceedings, the Assessing Officer noticed that the assessee had paid payment of Rs. 1.20 crore (rounded off) to non-resident out of the total commission of Rs. 1.49 crores (rounded off) paid during the year. On such commission paid to non-residents, the assessee had not deducted any tax at source. The Assessing Officer therefore, inquired with the assessee, who responded by suggesting that all services were rendered by the nonresidents outside India and therefore, no part of the income had accrued or arose in India. Such income was therefore, not taxable in India. The assessee relied on the decision of Supreme Court in case of GE India Technology Center P. Ltd v. Commissioner of Income Tax and anr reported in 327 ITR 456 and contended that, in such a case, there was no liability to deduct tax at source. 2. The Assessing Officer did not accept such explanation and made the addition of entire amount in terms of section 40(a)(ia) of the Act. The assessee carried the matter in appeal. CIT(A) gave substantial relief to the assessee. All additions, barring commission payment of Rs. 18.80 lakhs (rounded off) were deleted. With respect to the said sum of Rs. 18.80 lacs, Commissioner was of the opinion that this related to the machines which were sold in India. He did not accept the assessee's contention that the nonresident commission agents did not have any permanent establishment in India and the services were also rendered by them outside India. He was of the opinion that the activity of the sale had taken place in India and that therefore the case would fall within section 9(1)(i) of the Act. 3. The assessee carried the matter in appeal before the Tribunal. The Tribunal allowed the appeal on the ground that no part of the income had arisen or accrued in India. The payee was not liable to pay tax at such income. Requirement of TDS therefore would not arise. 4. As is well known, section 195 of the Act imposes requirement of deduction of tax at source on any person responsible for paying to a non-resident any sum chargeable under the provisions of the Act. The prime requirement therefore for applicability of the section is that the payment to the nonresident should be a sum chargeable under the provisions of the Act. In other words, the payment is not an income which is chargeable to tax in India. Requirement of deducting tax at source under section 195 of the Act would not arise. This aspect was elaborated by the Supreme Court in case of GE India Technology Center P. Ltd (supra) holding that on mere remittances of an amount to non-resident, duty to deduct tax at source would not arise unless such remittances contains wholly or partly taxable income. 5. Section 9 of the Act carries the heading "income deemed to accrue or arise in India. Sub-section (1) of section 9 provides that in following incomes,

15 ITA No.862 & 863/Mum/2018 M/s. Shamrock Pharmachemi Pvt.Ltd. contained in various clauses therein, shall be deemed to accrue or arise in India. Clause (i) of sub section (1) provides that all income accruing or arising, whether directly or indirectly, through or from any business connection in India or through or from any property in India or through or from any asset or source of Income in India or through the transfer of a capital asset situate in India shall be deemed to accrue or arise in India. 6. In the present case, as noted, admitted facts are that the non-resident agents appointed by the assessee for procuring export orders do not have permanent establishment in India. Their agents are situated outside India. Their activities as commission agents are being carried out outside India. The Tribunal therefore correctly held that there was no liability on the assessee to deduct tax at source. Merely because a portion of the sale to the overseas purchasers took place in India, would not change situation vis-avis the commission agents. 7. In the result, Tax Appeal is dismissed." 3. This question is therefore not entertained. Attention is also drawn to decision of Hon‗ble Gujarat High Court in the case of PCIT v. Nova Technoplast Private Limited (2018) 94 taxmann.com 322(Guj.) , wherein Hon‗ble Gujarat High Court held as under: ― Revenue is in appeal against the judgment of the Income Tax Appellate Tribunal, Rajkot Bench dated 28th August 2017, raising the following question for our consideration :— "Whether the Appellate Tribunal is right in law and on facts in not appreciating the fact that, the persons to whom commission of Rs.81,96,111/- was paid by the assessee, had earned such commission from the business activity accruing and airing in India and hence, the same is taxable in India, for which no TDS was made by the assessee and as such, the same is disallowance u/s. 40[a](ia) of the Act ?" 2. The issue pertains to the obligation on the part of the respondent- assessee to deduct tax at source in relation to the commission payment made to its foreign Commission Agent. After the Assessing Officer in the order of assessment disallowed such commission expenditure, for the failure of the assessee to deduct tax at source, the assessee carried the matter in appeal before the Appellate Commissioner. The Appellate Commissioner observed that keeping in mind the facts, circulars and legal position, the commission paid to NRI Agent whose income was not taxable in India did not incur TDS requirement. It was on this basis that the Appellate Commissioner deleted disallowances made by the Assessing Officer under Section 40 [a](ia) of the Income-tax Act, 1961. 3. Revenue carried the matter in appeal before the Tribunal. The Tribunal, by the impugned judgment, dismissed such appeal making the following observations : "We have heard the rival contentions and perused the material on record carefully. Section 195 required that any person

16 ITA No.862 & 863/Mum/2018 M/s. Shamrock Pharmachemi Pvt.Ltd. responsible for paying to a non resident any some chargeable to tax shall deduct tax there on at the rate in force. We noticed that assessee has paid commission to non-residents for services rendered in sales and marketing of assessee's product as commission agent outside India. We observe that the agents were notarized and not having fixed base in India and have rendered all the sales and marketing services outside India. We have also perused the judicial pronouncements of the Hon'ble Supreme Court in the case of GE India Technology CEN Private Limited v. CIT [2010]193 Taxman 234(SC), wherein, it was held that section 195 gets attracted in cases where payment made is a composite payment in which a certain proportion of payment has an element of income chargeable to tax in India and prayer seeks a determination of appropriate proportion of sum chargeable. We are of the considered view that the assessee has paid commission to non-residents in respect of services rendered abroad and the non-residents has not carried any business operation in India, therefore, we find that the assessee is not liable to deduct tax at source. We have also noticed that the assessing officer has not controverted the claim of the assessee that commission was paid to non-residents in respect of services rendered abroad. After looking to the fact as stated supra and judicial finding, we consider that disallowance of commission paid to the aforesaid nonresidents under the above circumstances is not appropriate under the provisions of Section 40(a)(ia) of the Act. Therefore, the appeal of the revenue is dismissed." 4. It can thus be seen that while confirming the order of CIT [A], the Tribunal relied on judgment of the Supreme Court in the case of G.E India Technology Centre (P.) Ltd. v. CIT [2010] 7 taxmann.com 18/193 Taxman 234/327 ITR 456 (SC). In such judgment, it was held and observed that the most important expression in Section 195 [1] of the Act consists of the words, "chargeable under the provisions of the Act". It was observed that, "..A person paying interest or any other sum to a nonresident is not liable to deduct tax if such sum is not chargeable to tax under the Act." Counsel for the Revenue, however, drew our attention to the Explanation 2 to sub- section [1] of Section 195 of the Act which was inserted by the Finance Act of 2012 with retrospective effect from 1st April 1962. Such Explanation 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 thereunder 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. 5. It is indisputably true that such explanation inserted with retrospective effect provides that obligation to comply with sub-section [1] of Section 195 would extend to any person resident or non-resident, whether or not nonresident person has a residence or place of business or business connections in India or any other persons in any manner whatsoever in India. This expression which is added for removal of doubt is clear from the plain language thereof, may have a bearing while ascertaining whether certain payment made to a non-resident was taxable under the Act or not. However,

17 ITA No.862 & 863/Mum/2018 M/s. Shamrock Pharmachemi Pvt.Ltd. once the conclusion is arrived that such payment did not entail tax liability of the payee under the Act, as held by the Supreme Court in the case of GE India Technology Centre (P.) Ltd. (Supra), sub-section [1] of Section 195 of the Act would not apply. The fundamental principle of deducting tax at source in connection with payment only, where the sum is chargeable to tax under the Act, still continues to hold the field. In the present case, the Revenue has not seven seriously contended that the payment to foreign commission agent was not taxable in India. 6. Tax Appeal is therefore dismissed. We have observed that the assessee has rightly relied on the decision of Hon‗ble Madars High Court in CIT v. Farida Leather Company in Tax Case Appeal No. 484 of 2015 , wherein Hon‗ble Madras High Court decided the appeal in favour of the taxpayer on the ground that even if the taxpayer has not applied for certificate from AO u/s 195(2) but since the sum paid to non resident is not chargeable to incometax under the provisions of the 1961 Act, no disallowance u/s 40(a)(i) is warranted, by holding as under: ―2.4 Aggrieved over the order of the Income Tax Appellate Tribunal, the Revenue has preferred this Appeal, raising the following substantial questions of law:— "1. Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that no disallowance can be made as per Section 40(a)(i) of the Act with respect to payment of commission to non-resident foreign agents without deduction of tax at source? 2. Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that the disallowance cannot be made by following the decision G.E India Technology Cen. (P.) Ltd., v. CIT [2010] 327 ITR 456 (SC), inspite of insertion of Explanation 4 to Section 9(1)(i) and Explanation 2 to Section 195(1) of the Act, which was introduced by Finance Act, 2012, w.e.f. 01.04.1962 to overcome the said judgment? 3. Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that the income of the payee, the foreign agent, is not taxable in India inspite of insertion of Explanation below Section 9(2) of the Act, which was introduced by Finance Act, 2010, w.e.f. 01.06.1976? 4. Whether on the facts and in the circumstances of the case, the income of foreign agent is not taxable in India, as fee for technical services under Section 9 (1) (vii) of the Act and consequently, the tax need not be deducted at source while paying the foreign agents?" 3. It is not in dispute that the assessee / company, engaged in the business of manufacturing and export of leather goods, availed the services of certain non-resident foreign agents for the purpose of procuring export orders and the assessee was paying commission for them. It is equally not disputed that even though they are rendering services to the assessee (Indian company), these services are rendered totally outside the country.

18 ITA No.862 & 863/Mum/2018 M/s. Shamrock Pharmachemi Pvt.Ltd. 4. Under such circumstances, whether the commission payment made to such agents are liable to be taxed in India, is the main issue to be decided in this appeal. 5. The main contention of the learned counsel for the assessee / respondent is that the agency commission / sales commission paid by the assessee to non-resident agents, for the services rendered by them, outside India, in procuring export orders for the assessee, would not attract or partake the character of "fees for technical services" as explained in the context of 9 (1) (vii) of the Act and therefore, there is no scope for the application of the provisions of Section 195 of the Act (Tax Deducted at Source). It is also contended that as the non-resident agents have neither business connection in India nor they have permanent establishment in India, they are liable to be taxed in India. 5.1 Yet another contention of the learned counsel for the assessee is that: (a) the assessee paid the amount by way of commission to foreign agents for the services rendered outside India; (b) the Tax Deduction at Source (TDS) is required to be made on all payments to non-residents, only if such payments are liable to be taxed in India. (c) following the decision of this Court, CIT v. Faizan Shoes (P.) Ltd. [2014] 367 ITR 155/226 Taxman 115/48 taxmann.com 48 (Mad.), the assessee is not liable to deduct tax at source, when the non-resident agent provides services outside India on payment of commission. 5.2 The contention of the Revenue is that such services are attracted by Explanation (2) to Section 9 (1) (vii) of the Act and therefore TDS certificate is essential. 6. Whether this contention is correct, is the issue to be decided. 7. In order to appreciate this contention, it is necessary to consider the relevant provisions of the Act:— (i) Section 40(a)(i) of the Act :— "Section 40 - Amounts not deductible: Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income 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 (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 XVIIB and such tax has

19 ITA No.862 & 863/Mum/2018 M/s. Shamrock Pharmachemi Pvt.Ltd. not been deducted or, after deduction, has not been paid on or before the due date specified in sub-section (1) of section 139: 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,— (A) "royalty" shall have the same meaning as in Explanation 2 to clause (vi) of subsection (1) of section 9: (B) "fees for technical services" shall have the same meaning as in Explanation 2 to clause (vii) of sub-section (1) of section 9: (ia) thirty per cent of any sum payable to a resident, on which tax is deductible at source under Chapter XVIIB and such tax has not been deducted or, after deduction, has not been paid on or before the due date specified in sub-section (1) of section 139. 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 thirty per cent of, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid. Provided further that where an assessee fails to deduct the whole or any part of the tax in accordance with the provisions of Chapter XVIIB on any such sum but is not deemed to be an assessee in default under the first proviso to sub-section (1) of section 201, then, for the purpose of this sub-clause, it shall be deemed that the assessee has deducted and paid the tax on such sum on the date of furnishing of return of income by the resident payee referred to in the said proviso.' (ii) Explanation 2 to Section 195(1) of the Act :— 'Section 195 - Other sums: (1) Any person responsible for paying to a 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 provisions of this Act (not being income chargeable under the head "Salaries") shall, at the time of 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 rates in force : Provided that in the case of interest payable by the Government or a public sector bank within the meaning of clause (23D) of section 10 or a public financial institution within the meaning of that clause, deduction of tax shall be made only at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode :

20 ITA No.862 & 863/Mum/2018 M/s. Shamrock Pharmachemi Pvt.Ltd. Provided further that no such deduction shall be made in respect of any dividends referred to in section 115-O. [Explanation 1] :............... [Explanation 2.- For the removal of doubts, it is hereby clarified that the obligation to comply with sub-section (1) and to make deduction thereunder 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." Explanation 4 to Section 9 (1) (i) of the Act:— "Section 9 - Income deemed to accrue or arise in India — (1) The following incomes shall be deemed to accrue or arise in India : (i) all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situate in India . ** ** ** Explanation 4.- For the removal of doubts, it is hereby clarified that the expression "through" shall mean and include and shall be deemed to have always meant and included ''by means of", "in consequence of" or "by reason of".' 7.1 Section 40 of the Act spells out what amounts are not deductable from the income charged to tax under the profits and gains of business or profession. 7.2 Section 40(a)(i) of the Act deals with interest and other sums payable outside India. The provisions of this sub-clause made applicable to interest have been extended to payment of royalty, technical fees and any other sum chargeable under this Act. The section provides that the sums covered by the sub-clause, which are chargeable under the Act and are payable outside India, shall not be allowed as an expenditure to the assessee, unless tax is paid thereon or is deducted therefrom under Chapter XVII-B of the Act. 7.3 Section 195(1) of the Act deals with deduction of tax from payment to non-residents and foreign companies. Section 195(1) of the Act comes into play at a stage where the payer, who is enjoined to deduct the tax, either credit such income to the account of the payee or make payment thereof, whether in cash / cheque / draft or any other mode. The taxability of such amount in the hands of the payee or occasioning of the taxable event is alien for the purpose of Section 195(1) of the Act. 7.4 Section 195(2) is an enabling provision, enabling an assessee to file an application before the Assessing Officer to determine the appropriate proportion of the sum chargeable and upon such determination, the tax has to be deducted under Section 195(1) of the Act. The payment is made credited to the account of

21 ITA No.862 & 863/Mum/2018 M/s. Shamrock Pharmachemi Pvt.Ltd. the payee. 8. The question now is, whether the assessee ought to have deducted tax at source as contemplated under Section 195 of the Act, when the assessee paid commission to foreign agent. 9. This question has been answered by the Hon'ble Supreme Court, in the case of G.E.India Technology Centre (P.) Ltd. (supra), 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 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. 10. Further, just because, the payer / assessee has not obtained a specified declaration from the Revenue Authorities to the effect that the recipent is not liable to be taxed in India, in respect of the income embedded in the particular payment, the Assessing Officer cannot proceed on the basis that the payer has an obligation to deduct tax at source. He still has to demonstrate and establish that the payee has a tax liability in respect of the income embedded in the impugned payment. 11. 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 are 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 consist in the Idevelopment and transfer of a technical plan or design. The parties merely source the prospective buyers for effecting sales by the assessee, and is analogous to a land or a house / real estate agent / broker, who will be involved in merely identifying the right property for the prospective buyer / seller and once he completes the deal, he gets the commission. Thus, by no stretch of imagination, it cannot be said that the transaction partakes the character of "fees for technical services" as explained in the context of Section 9(1)(vii) of the Act.

22 ITA No.862 & 863/Mum/2018 M/s. Shamrock Pharmachemi Pvt.Ltd. 12. As the non-residents were not providing any technical services to the assessee, as held above and as held by the Commissioner of Income Tax (Appeals), the commission payment made to them does not fall into the category of "fees of technical services" and therefore, explanation (2) to Section 9(1)(vii) of the Act, as invoked by the Assessing Officer, has no application to the facts of the assessee's case. 13. In this case, the commission payments to the non resident agents are not taxable in India, as the agents are remaining outside, services are rendered abroad and payments are also made abroad. 14. The contention of the learned counsel for the Revenue is that the Tribunal ought not to have relied upon the decision G.E.India Technology's case, cited supra, in view of insertion of Explanation 4 to Section 9(1)(i) of the Act with corresponding introduction of Explanation 2 to Section 195(1) of the Act, both by the Finance Act, 2012, with retrospective effect from 01.04.1962. 15. The issue raised in this case has been the subject matter of the decision, in the recent case, CIT v. Kikani Exports (P.) Ltd. [2014] 369 ITR 96/[2015] 232 Taxman 255/49 taxmann.com 601 (Mad.) 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, 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.' 16. When the transaction does not atract 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. 17. In the result, this Tax Case Appeal is dismissed. The order passed by the Income Tax Appellate Tribunal is confirmed. The aforesaid judgment of Hon‗ble Madras High Court in the case of Farida Leather Company (supra) directly covers the dispute between rival parties. The Hon‗ble Madras High Court was seized for AY 2010- 11 in the above case. Thus, based on our detailed discussions and reasoning, we hold that under factual matrix of the case no additions u/s 40(a)(i) of the 1961 Act read with Section 195 are warranted in the instant case on payments made by assessee to four overseas agents towards commission expenses for generating export orders or facilitating import for the assessee. We affirm the decision of learned CIT(A) and Revenue fails in this appeal. We order accordingly.

23 ITA No.862 & 863/Mum/2018 M/s. Shamrock Pharmachemi Pvt.Ltd. Respectfully following the aforesaid decision, the grounds No.‘a’ and ‘b’ raised by the revenue are hereby dismissed.

24 ITA No.862 & 863/Mum/2018 M/s. Shamrock Pharmachemi Pvt.Ltd. 10. In the result, both appeals of the revenue are dismissed.

Order pronounced in the open court on this 11/11/2020

Sd/- Sd/- (SAKTIJIT DEY) (M.BALAGANESH) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai; Dated 11/11/2020 Thirumalesh, sr.ps

Copy of the Order forwarded to : The Appellant 1. The Respondent. 2. The CIT(A), Mumbai. 3. CIT 4. DR, ITAT, Mumbai 5. 6. Guard file. //True Copy//

BY ORDER,

(Asstt. Registrar) ITAT, Mumbai