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Income Tax Appellate Tribunal, “A” BENCH : BANGALORE
Before: SHRI J. SUDHAKAR REDDY & MS. BEENA PILLAI
O R D E R PER MS. BEENA PILLAI, JUDICIAL MEMBER Present appeal has been filed by revenue against order dated 20/06/16 passed by Ld. CIT (A)-2 Bengaluru for assessment year 2011-12 on following grounds of appeal: “1. Whether CIT(Appeals) erred in deleting the disallowance made u/s. 40(a)(i) and 40(a)(ia) in respect of payment of Rs. 2,60,48,963/- being commission on export sales.
2. Any other ground to be adduced at the time of hearing.”
Brief facts of the case are as under: Assessee filed its return of income for year under consideration declaring Nil income and revised subsequently on 28/09/2011, again declaring nil income. The return was processed under section 143 (1) of the Act, and the case was selected for scrutiny. Subsequently, notice under section 143 (2) along with questionnaire and notice under section 142 (1) was issued to assessee, in response to which representatives of assessee appeared before Ld. AO and filed requisite details as called for.
Is Ld. AO observed that assessee is engaged in manufacture and export of cotton yarn/knitted fibres. From the books of accounts produced by assessee, Ld. AO observed that assessee debited a sum of Rs.2,60,48,963/-, towards commission on export sales on which TDS under section 195(1) was not deducted. The Ld.AO, accordingly disallowed expense under section 40 (a) (ia) of the Act, for non-deduction of TDS under section 195 (1) of the Act. 4. Aggrieved by addition made by Ld.AO, assessee preferred appeal before Ld.CIT (A), who allowed claim of assessee, by following order passed by her predecessor in assessee’s own case for assessment year 2010-11. Aggrieved by order of Ld.CIT (A), revenue is in appeal before us now. 5. At the outset, Ld.AR submitted that, this issue stands squarely covered in favour of assessee by decision of this Tribunal in assessee’s own case for assessment year 2010-11 in vide order dated 30/05/16. On Page 3 of Ld.SR. DR placed reliance upon order passed by Ld.AO.
We have perused submissions advanced by both sides in the light of the records placed before us. We have also perused the order relied upon by Ld. AO in assessee’s own case for assessment year 2009-10 (supra). Is it is observed that as rightly submitted by Ld.AR the issue stands squarely covered in favour of assessee’s. Further it is also been submitted that for assessment year 2013-14 no disallowance has been made by Ld.AO and assessment under section 143 (3) of the act has been completed. This Tribunal vide deciding this issue for assessment year 2009-10 held as under: “6. We have considered the rival submissions as well as the relevant material on record. The payment in question was paid by the assessee to various overseas marketing agents as per the respective agreements between the assessee and the agents. Marketing agents were appointed to market, promote and sale the product of the assessee within the respective territory in accordance with the terms of the agreements. Therefore, the payment was made to the market agents against the performance to collect information regarding the products and to deal with the customers of the assessee in respect of the sale of the assessees products in the respective territories. The payment is termed as commission payable to the marketing agents as per Clause 2 of the agreement which is based on FOB value of the product as a percentage to be decided on case to case basis for the services rendered outside India. Thus it is clear from the terms and conditions of the agreement that the payment in question were made to the non- resident marketing agents for their services rendered outside India. It is admitted fact that these non-resident agents have non PE in India therefore the income in their hand which is not a royalt.x-.4.e.for Technical Services' (in short 'FTS') is not chargeable to tax in India, The Assessing Officer has not given a finding that the payment in question is in the nature of FTS or royalty as per the provisions of Section 9(1)(vi) and 9(1)(vii)
Page 4 of Act. Once the payment in question is not treated as ETS or royalty then, the same being business income in the hands of the non-resident marketing agents is not chargeable to tax in India in the absence of PE. The CIT (Appeals) has allowed the claim of the assessee by giving the finding in paras 5 & 6 as under : "5. I have considered the appellant's submission also perused the assessment order. The appellant engaged in the manufacture and export of cotton yarn/knitted fabrics. The observation of the Assessing Officer is that the appellant has debited a sum of Rs.1,68,59,037 towards an export soles and on such commission TOS was not deducted. However, the appellant’s contention is that the appellant company had appointed agents at various countries to collect orders and pass them to the company in India for export of the goods dealt by the company. These agents are paid agreed commission based on the quantity /free of the exported goods against the order procured by the agent. The operation of the agents operates on behalf of the appellant company. These agents do not have any operation in India nor do they carry out any other business in India. The appellant had furnished copies of 'Marketing Agency Agreement' and from it transpires that agents are non-resident agent and their business operation in abroad only and PE whatsoever in India. In this context the appellant placed reliance on the decision of the Hon'ble ITAT, Hyderabad in the case of DCIT Vs. Divi's Laboratories Ltd. (2011) 12 taxmann.Com 103 (Hyd) - 9. It Is pertinent to note that s. 195 of the Act has to be read along with the charging ss. 4, 5 and 9 of the Act. One should not read s. 195 to mean that the moment there is a remittance, the obligation to deduct TDS automatically arises. If we were to accept such contention, it would mean that on mere payment in India, income would be said to arise or accrue in India. These are the observations made in the judgment of apex Court in the case of GE India Technology Centre (P) Ltd. vs. CIT (supra) relied on by the learned counsel for the assessee, for the proposition that provision are tax applies only to those sums which are chargeable to tax under the IT Act. If the contentions of the Department are to be taken as correct that any person making payment to a nonresident is necessarily required to deduct tax, then the consequence would be that the Department would be entitled to appropriate the monies Page 5 of IT Act by which a payer can obtain refund. As per s. 237 r.w.s. 199 of the Act implies that 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 of the Act 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. 40(a)(ia) of the Act.
The judgment of the Karnataka High Court in the case of Samsung Electronics Co. Ltd. & Ors. vs. CIT & Ors. (2009) 227 CTR (Kar) 335 (2009) 31 DTR (Kar) 257 : (2010) 320 ITR 209 (Kar) retied on by the Department, dealt on whether tax is to be deducted at source, under s. 195 of the Act, in respect of payment made to non-resident, on import of software. The judgment of the Karnataka High Court is largely based on the judgment of Supreme Court in the case of Transmission Corporation of AP Ltd. & Anr. vs. CIT (1999) 155 CTR (SC) 489 (1999) 239 ITR 587 (SC). However, the Karnataka High Court not followed the subsequent binding judgment of the Supreme Court in the case of Vijay Ship Breaking Corpn. & Ors vs CIT (2008) 219 CTR (SC) 639 : (2008) 14 DTR (SC) 74 : (2009) 314 ITR 309 (SC) wherein the apex Court has categorically held that the resident is not required to deduct TDS under s. 195(1) of the Act, if the income of non-resident recipient is not taxable in India. Given this binding precedent, the judgment of Karnataka High Court in the case of Samsung Electronics Co. Ltd & Ors. vs. CIT & Ors. (supra) would not apply to the cases where the non-resident recipient is not taxable in India, We also find that the judgment of apex Court in the case of Ishikawajrna-Harima Heavy Industries Ltd. vs. Director of IT (2007) 207 CTR (SC) 361 (2007) 288 ITP. 408 (SC) wherein it vas held that for s. 195 is to be attracted, the services rendered by the nonresident should have been rendered in India and also should have been used in India and that, this twin tests has to be satisfied for s. 195 is to be attracted. We find that the legislation introduced the Explanation to s. 9(2) of the Act, after this judgment, with retrospective effect from 1st June, 1976 in the Finance Act, 2007, Despite this introduction of Explanation to s. 9(2) of the Act, the Karnataka High Court in the case of Jindal Thermal Power Co. Ltd. vs. Dy. CIT (2009) 225 CTR (Kar) 220 (2009) 26 DTR (Kar) 172 : (2010) 321 ITR Page 6 of 31 (Kar) held that the law laid down by the apex Court in the case of Ishikawajima Harima Heavy Industries Ltd. (supra) still holds good despite the retrospective amendment to S. 9 of the Pt. In our opinion, the requirement of services of the non- resident being rendered in India and being utilized in India is still valid, despite the judgment of the Karnataka High Court in the case of Samsung Electronics Co. Ltd. & Ors. (supra) and withdrawal of earlier circulars issued on this subject by CBDT.
It is well-settled law that the provisions f DTAA would prevail over the provisions of the IT Act, would seem to have been completely not followed by Karnataka High Court while rendering the judgment in the case of Samsung Electronics Co. Ltd. & Ors. (supra). Therefore, in our considered opinion, the law related to deduction of tax at source under s. 195 has not been changed consequent to the judgment of Samsung Electronics Co, Ltd. & Ors. (supra) or withdrawal of earlier circulars, on this issue by the CBDT and therefore the rigours of s. 40(a)(0) of the Act, disallowance of expenditure, is not attracted for the payments made to the overseas agents by the assessee without deduction of TDS. In the case under consideration, the CIT(A) observed that the AO has not been able to establish that there is specific intention of the payee to receive the payment within the territory of India as per the decision in the case of Ogale Glass Works Ltd. (supra); therefore, in our opinion, the CIT(A) rkght!y did not agree with the view taken by the A0 with regard to the addition made on this issue and hence, the CIT(A) is justified in directing the A0 to delete the said addition. After considering the totality of facts and the circumstances of the case, we are not inclined to interfere with the order of the CIT(A) on this issue and accordingly the same is upheld. Hence the grounds raised by the Revenue for all the years under consideration are rejected"
6. A plain reading of the Hon'ble IIAT, Hyderabad the issue on hand is squarely applicable and respectfully following the said decision, the Assessing Officer is directed to allow of Rs. 1,68,59,037 as deduction under Section 37 of the Act. Thus it is clear that the CIT (Appeals) has followed the decision of the Tribunal in case of Divi's Laboratories Pvt. Ltd. (supra). The learned Departmental Representative has not brought to our notice any contrary decision/precedence. In view of the Page 7 of Assessing Officer as ITS or royalty then in the absence of PE, it is not chargeable to tax in India. The learned Departmental Representative has relied upon the Explanation 2 of Section 195(1) of the Act. However, we are of the view that this Explanation 2 to Section 195(1) would not obliterate the pre- requisite condition of Section 195(1) that "sum chargeable under the provisions of the Act". We further note that an identical issue has been considered by the co-ordinate bench of this Tribunal in the case of Zanav Home Collection (supra) in paras 38 to 41 asunder: 38. We have considered the rival submissions The copies of the Agreement between the Assessee and the non-resident (7 out of the 10 non-residents listed in the earner part of this order) has been filed before us as Annexure-H in the paper book filed by the Assessee. The main clauses in the agreement needs to be seen to appreciate the contentions of the parties before us.(Agreement between Assessee and M/.Duo Textiles). Clause-1, 3 and 4 of the Agreement reads as follows:
1. 1. APPOINTMENT: Principal grants Agent the right to sell the merchandise (stipulated in Article 2) in the territory (stipulated in Article 3) and Agent accepts such appointment.
3. TERRITORY: The Territory covered under this agreement is confined to South Africa. 4, COMMISSION: Principal shall allow the Agent 5% commission for all Merchandise (based on FOB prices) Commission are not payable later than 2 (two) months after merchandise have been shipped in respect of all orders which have been accepted and executed by Principal. However, that no such commissions shall be payable until Principal receives the full amount of payment due to him."
39. The terms of the Agreement in the case of all the agents are identical. It is clear from the agreements that the non- residents rendered services outside India and the nature of services rendered by them is as agent of and Indian exporter operating in his own country. There is absolutely no territorial nexus with India as far as the non-residents are concerned. The nonresident's source of income outside India and accrues and arises outside India. The Hon'ble Supreme Court in the Page 8 of Caroorandum Co. v. CIT (1977) 108 ITR 335, has held that "the carrying on of activities or operations in India is essential to make the nonresident have business conneition in India in order that he may be liable to tax in respect of the income attributable to that business connection the CBDT in Circular No. 17(XXXVII) of 1953 dated 17th July, 1953 has stated as follows:- "Foreign agents of Indian exporters - A foreign agent of an Indian exporter operates in his own country and no part of his income arises in India. Usually, his commission is remitted directly to him; arid is, therefore, not received by or on his behalf in India. Such an agent is not liable to Indian income- tax." The CBDT circular No.786 dated 07/02/2000 regarding taxability of export commission payable to non-resident agents rendering services abroad has stated that "No tax is therefore deductible under section 195 and consequently the expenditure on export commission and other related charges payable to a non-resident for services rendered outside India becomes allowable expenditure." The conclusions of the A0 and CIT(A) that the non-resident had a business connection in India in our view is without any basis and cannot be sustained.
On applicability of Expin-2 to Sec.195(1) of the Act which was introduced by the finance Act 2012 w e f 1 4 i962 we are of the view. That the said explanation is applicable only when there is accrual of income in India. When the conclusion reached is that there is no accrual of income in India, we fail to see how Expin,2 to Sec. 1951) of the Act are attracted.
In view of the above conclusions, we are of the view that there was no obligation on the part of the Assessee to deduct tax at source while making payment to the non-resident, Consequently, no disallowance of commission expenses paid to non-resident could be made invoking the provisions of sec. 40a)(1) of the Act. We hold accordingly and direct the AO to delete the disallowance so made.' Accordingly, in view of the facts and circumstances of the case as well as the decision of this Tribunal, we do not find any error in the impugned order of the CIT (Appeals).”
Both parties admit that facts and circumstances of the case for year under consideration is similar and identical to fact for assessment year 2009-10. Revenue has also not been able to bring on record any differentiating feature is for the year under consideration to deviate from the aforestated view taken by this Tribunal in assessee’s own case for assessment year 2009-10. Therefore, respectfully following the same, we uphold the view taken by Ld. CIT (A) and dismiss the grounds raised
by revenue.
8. In the result appeal filed by revenue stands dismissed. Order pronounced in the open court on 07th day of June, 2019.