ITO, NEW DELHI vs. SH. KULBEER SINGH, NEW DELHI

INCOME TAX APPELLATE TRIBUNAL DELHI BENCH “D”: NEW DELHI BEFORE SHRI AMIT SHUKLA, JUDICIAL MEMBER AND SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER ITA No. 5204/Del/2014 (Assessment Year: 2010-11) ITO, Vs. Kulbeer Singh, Ward-26(1), H-432, Vikas Puri, New Delhi New Delhi PAN: AMQPS5847P (Appellant) (Respondent)

Revenue by : Shri Amit Jain, Sr. DR Assessee by: None Date of Hearing 25/07/2018 Date of pronouncement 03/10/2018

O R D E R PER PRASHANT MAHARISHI, A. M. 1. This appeal is filed by the Income Tax Officer, Ward – 26 (1), New Delhi against the order of The Commissioner Of Income Tax Appeals – XXIV , New Delhi dated 3/7/2014 for AY 2010 – 11 where the only issue is that the learned CIT – A has deleted the disallowance of RS. 44140860/– on account of commission paid to the various commission agents outside India. According to the assessing officer this expenditure is disallowable as income of foreign agents is chargeable to tax as per the income tax act, 1961 as the agents have the „business connection‟ in India and

ITO Vs Kulbeer Singh ITA No. 5204/Del/2014 (Assessment Year: 2010-11 tax should have been deducted under section 195 of the income tax 1961 which assessee has failed to do so. 2. The brief fact shows that assessee is an individual, proprietor of M/s Dhawan creations. He is engaged in the business of export of fabrics and general merchants. He filed return of income on 14/9/2010 showing income of Rs. 22, 37, 410/–. During assessment proceedings, it was noted that assessee has debited expenditure of Rs. 44, 140, 860/– as foreign agent commission in the profit and loss account under the head commission expenditure. The assessee was asked to show that why it is not be disallowed as tax has not been deducted thereon. Assessee submitted that the services have been provided by non-resident agents outside India and therefore no part of such income accrues to them in India by virtue of section 9 of the income tax act. Therefore, it was submitted that it is not taxable in India as per the provisions of section 195 and no tax is required to be deducted. The learned assessing officer did not accept the explanation of the assessee as there was no written agreement with the foreign agents and further no certificate under section 197 of the act has been obtained by assessee for non-deduction of tax at source. Therefore, in absence of clear identity of Page | 2

ITO Vs Kulbeer Singh ITA No. 5204/Del/2014 (Assessment Year: 2010-11 commission agents the learned AO disallowed the same. To support his contention the learned assessing officer discussed the provisions of the income tax and relied upon the decision of the coordinate bench in case of Lufthansa cargo India private limited versus DIT and also various other decisions. He further referred to the withdrawal of circular number 23 dated 23 July 1969, circular number 163 dated 29 May 1975 and circular number 786 dated 7 February 2000 and therefore according to him tax should have been deducted by the assessee at source on such foreign commission payment. He further relied upon the decision of authority for advance ruling in case of SKF Boilers and dryers private limited wherein it has been held that withholding of tax is mandatory under section 195 of the income tax act on export commission paid to non-resident agents, since commission is deemed to accrue or arise in India. He further referred to the circular number 7/2009 and based on discussion made in the assessment order held that export commission paid to the parties situated in Afghanistan by the assessee has deemed to accrue or arise in India hence it attracts the provisions of section 195 of the act. Accordingly he disallowed Rs. 44140860 paid as export commission under section 40 (a) (i) Page | 3

ITO Vs Kulbeer Singh ITA No. 5204/Del/2014 (Assessment Year: 2010-11 of the act and added to the total income of the assessee. Consequently the assessment order was passed under section 143 (3) of the income tax act on 28/3/2013 determining the total income of the assessee at Rs. 46 3860 250/– against the returned income of the assessee at Rs. 223 7412/–. 3. Aggrieved, assessee preferred appeal before The Commissioner Of Income Tax Appeals. He passed an order on 3/7/2014 deleting the whole addition. He gave his detailed reasons as per para number five of his order. Therefore, the learned assessing officer aggrieved with the order of the Commissioner appeals has filed appeal before us. 4. Supporting the order of the learned assessing officer, the learned senior departmental representative Shri Amit Jain stated that income of the foreign agent has business connection in India and therefore it is chargeable to tax as per the income tax act. He submitted that, as the income is chargeable to tax as per the income tax act the assessee should have deducted tax at source under section 195 of the act. Assessee has neither deducted tax nor obtained any certificate from the assessing officer stating that the income of the foreign agent is not chargeable to tax in India and therefore the assessing officer has correctly disallowed Page | 4

ITO Vs Kulbeer Singh ITA No. 5204/Del/2014 (Assessment Year: 2010-11 the above sum. He further submitted that by withdrawal of the various circulars issued by the CBDT the position has changed and tax should have been deducted. 5. Despite notice, none appeared on behalf of assessee and therefore the issue is decided based on information available on record. 6. We have carefully considered the contentions raised by the learned departmental representative as well as the reasons given by the learned assessing officer in his assessment order. We have also gone through the reasons given by the learned CIT – A in his order while deleting the above addition. The learned Commissioner appeals has dealt with the whole issue vide para number 3 onwards of his order as under:-

“3. Briefly stated facts of the case are that the appellant filed his Return of income for the relevant assessment year 2010-11 on 14.09.2010 declaring an income of Rs.22,37,410-. The case was selected for scrutiny through CASS and notice u/s 143 (2) was issued and served upon the appellant within the stipulated period. During the course of assessment, the Assessing Officer(herein after The A.O.) noted that the appellant has incurred expenditure of Rs. 4,41,40,860/- by way of commission paid to the following persons:- SI.N Name of the Agent Amount of commission o. paid(ln Rs) Mr. Atequallah 2,46,61,750 1 2 Mr. Amanullah 1,94,79,110 TOTAL 4,41,40,860 Page | 5

ITO Vs Kulbeer Singh ITA No. 5204/Del/2014 (Assessment Year: 2010-11

The Assessing Officer also noted that the appellant has not deducted tax at source on the payment of aforesaid commission. The Assessing Officer requested the appellant as to explain why the TDS was not deducted on the aforesaid payment of commission to the aforesaid persons u/s 195 of the I T Act and in the absence of any TDS, why the payment of aforesaid commission should not be disallowed u/s 40(a)(ia) of the I T Act. In reply, the appellant submitted before the Assessing Officer that the commission was paid on account of export sales and the impugned commission has been paid to the agents who happened to be non- resident/foreign agent for services rendered by them outside India. Therefore, no income is deemed to accrue or arise to them in India. They do not have taxable income in India. Hence, provisions of Section 195 of the Income Tax Act are not applicable in their case. However, the Assessing Officer rejected the aforesaid explanation of the appellant and held that provisions of Section 195 are attracted in respect of the aforesaid commission paid and since the appellant has failed to deduct tax at source on the payment of commission u/s 195 of the I T Act, the claim of expenditure of RS 4,41,40,860/- by way of foreign commission is liable to be disallowed u/s 40(a)(ia) of the I T Act. Accordingly, the Assessing Officer disallowed the expenditure claim on account of commission of Rs. 4,41,40,860/- and completed the assessment u/s 143(3) of the I T Act vide order dated 28.03.2013. 3.1 Aggrieved by the aforesaid assessment order, the present appeal has been filed. 4. The only effective issue in the present appeal is against the disallowance of Rs. 4,41,40,860/- being the amount of commission paid to the non-resident/ foreign agents for the services rendered abroad, on the ground that said export commission paid to various parties situated in different foreign countries is deemed to accrue and arise in India and therefore, as per section 195 of the Income Tax Act, 1961, tax was required to be deducted and since it has not been deducted, the disallowance is to be made u/s 40(a)(i).

ITO Vs Kulbeer Singh ITA No. 5204/Del/2014 (Assessment Year: 2010-11 4.1 Before me, the Ld AR submitted that the appellant is an individual and is engaged, inter alia, in the business of export of General Merchandise & Fabric to Afghanistan. During the year under appeal, the appellant incurred an expenditure of Rs. 4,41,40,860/- by way of commission to the foreign agents who were from Afghanistan namely Mr. Atequallah & Mr. Amanullah of Kabul (Afghanistan) to whom the commission of Rs.2,46,61,750 & Rs.1,94,79,110 respectively were paid. The details of party-wise & invoice-wise orders procured through Mr. Atequllah along with copy of agreement & confirmation of commission paid and copy of his passport are enclosed A-2 to A-5. Further, details of party-wise & invoice-wise orders procured through Mr. Amanullah along with copy of agreement & confirmation of commission paid and copy of his passport are enclosed A-6 to A-9. As regards legal position for allowance of commission paid to foreign agents, we wish to state that the various provisions of Income Tax Act which are applicable & have so been discussed by the Ld. A.O in the order are Section-195,4, 5 & 9 of Income Tax Act, 1961.The Section -195 of the Act has to be read along with charging Section-4,5 & 9 of the Act. Section 195 of the Act deals with the deduction of tax at source from the payments made to non-residents. The relevant extracts of section 195 of the Act are reproduced herein for the sake of ready reference:— "Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest 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 In section 195(1), the crucial expression is 'any other sum chargeable under the provisions of this Act. It would, thus, mean that the person making payment to the non-resident would be liable to deduct tax, if the payment so made is chargeable to tax under the Act. Impliedly, if the payment is not chargeable to tax under the Act, the payer would not be Page | 7

ITO Vs Kulbeer Singh ITA No. 5204/Del/2014 (Assessment Year: 2010-11 liable to deduct tax at source. The chargeabiiity to tax mentioned in the above provision is directly linked with section 4, which is the main charging section. In other words, if the charge under section 4 fails, automatically section 195 would be inapplicable. Section 195 of the Act will be applicable only if the payment made to the non-resident is chargeable to tax. At this juncture, it would be pertinent to refer to the section 4, the relevant provisions of which are as under:— "Where any Central Act enacts that income-tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged fcr that year in accordance with, and subject to the provisions (including provisions for the levy of additional income-tax) of, this Act in respect of the total income of the previous year of every person". Thus, section 4 makes it evident that the income-tax shall be charged for a particular year in accordance with the provisions of this Act. In this regard section 5 of the Act which deals with the scope of total income, in the case of a non- resident assessee, inter alia, provides as under:— "Subject to {he provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source 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 or arise to him in India during such year. Explanation 1.—Income accruing or arising outside India shall not be deemed to be received in India within the meaning of this section by reason only of the fact that it is taken into account in a balance sheet prepared in India. The plain language of section 5 provides that in the case of a non-resident assessee, the total income takes within its ambit two types of incomes: one, the income which is received or is Page | 8

ITO Vs Kulbeer Singh ITA No. 5204/Del/2014 (Assessment Year: 2010-11 deemed to be received in India, and second, the income which accrues or arises or is deemed to accrue or arise to him in India. In the present case, we are concerned with the later limb of this scope. Section 9 of the Act provides for the income deemed to accrue or arise in India. This is a fiction created by the enactment which is essential in fixation of the charge under the Act. The relevant extracts of section 9 are reproduced herein for the sake of ready reference:— "(1) The following incomes shall be deemed to accrue or arise in India:— (i) all incomes 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 : "Provided that such business connection shall not include any business activity carried out through a broker, general commission agent or any other agent having an independent status, if such broker, general commission agent or any other agent having an independent status is acting in the ordinary course of his business : Provided further that where such broker, general commission agent or any other agent works mainly or wholly on behalf of a non-resident (hereafter in this proviso referred to as the principal non-resident) or on behalf of such non-resident and other non-residents which are controlled by the principal non-resident or have a controlling interest in the principal non¬resident or are subject to the same common control as the principal non-resident, he shall not be deemed to be a broker, general commission agent or an agent of an independent status. Section 9, as aforesaid, creates a legal fiction and provides that certain income shall be deemed to accrue or arise in India. In the present case, we are concerned with clause (/) of Page | 9

ITO Vs Kulbeer Singh ITA No. 5204/Del/2014 (Assessment Year: 2010-11 the section 9(1). Let us analyze each of these clauses one-by- one: Section 9(1)(/): Business connection ♦ The plain language of section 9(1)(/) of the Act provides that all income accruing or arising, whether directly or indirectly, through or from any business connection in India, shall be deemed to accrue or arise India. Applying the above legal provisions of the Act to the factual matrix of the case, it becomes apparent that the question which needs to be addressed is whether the income earned by foreign commission agents, whose work is limited to soliciting customers in relation to the overseas business of the Indian enterprise and forwarding the list of such probable customers to the Indian enterprise, accrues or arises from any business connection in India. In other words, does this foreign agents commission have any business connection with India? ♦ This issue has been the subject matter of various circulars issued by the Central Board of Direct Taxes (CBDT). The relevant extracts of one such circular is as under: Circular No.23, dated 23 July, 1969: "Foreign Agents of Indian Exporters: - A foreign agent of Indian exporter operates in his own country and no part of his income arises in India. His commission is usually remitted directly to him and is, therefore, not received by him or on his behalf in India .Such an agent is not liable to income-tax in India on the commission." ♦ The above mentioned Circular No.23 mentions that the foreign agents of Indian exporters are not liable to income-tax in India on the commission. This circular was relied upon by the Hon'ble Supreme Court of India in the case of CITv. Toshoku Ltd.[ 1980] 125 ITR 525 wherein the Apex Court held as under:— "...if no operations of business are carried out in the taxable authorities, it follows that the income accruing or arising abroad through or from any business connection Page | 10

ITO Vs Kulbeer Singh ITA No. 5204/Del/2014 (Assessment Year: 2010-11 in India cannot be deemed to accrue or arise in India. The commission amounts which were earned by the non- resident assessee for services rendered outside India cannot, therefore, be deemed to be incomes which have either accrued or arisen in India..." Section 9(1 )(vii): Fees for technical services "Explanation 2 to section 9 contains an inclusive definition of business connection but it applies only to a business activity carried out through a person acting on behalf of a non¬resident. That situation does not exist here. Now we also wish to invite your attention to the judgment of Supreme Court The Supreme Court in the case of Ishikawajima Harima Heavy Industries Limited Appeal (civil) 9 of 2007/ (SLP (Civil) No.5318 of 2005) held that in order to attract Section 195 of the Act the services rendered by the non¬resident should have been rendered in India and also should have been used in India. This twin tests has to be satisfied in order to attract Section 195 of the Act. After the decision of Ishikawajima Harima Heavy Industries Limited the Legislation amended the Explanation to Section 9(2) of the Act with retrospective effect. Despite this Amendment the Karnataka High Court in the case of Jindal Thermal Power Co. Ltd ILR 2004 KAR 3463 held that the decision rendered by the Supreme Court in the case of Ishikawajima Harima Heavy Industries Limited Bench still remains valid. We also place reliance on the following judgments: (a) The Assistant Commissioner of income Tax, Company Circle 11(1),Chennai 600034 Vs. M/s. farida Shoes Private Ltd., (b) M/s Sundram Brake Linings Ltd., Vs. The Assistant Commissioner of income Tax. All the relevant provisions with amendments & circulars have been discussed in detail in these cases & it has been held in these cases that for applying provisions of Section 195, it is must to see that the payment being made to Non- Resident is chargeable to tax. The facts of our case are identical to the facts of above cited cases, the payment made is not chargeable in the hands foreign agents & as such the Page | 11

ITO Vs Kulbeer Singh ITA No. 5204/Del/2014 (Assessment Year: 2010-11 provisions of Section195 are not applicable & thus addition as made by Ld. A.O is not as per law & it is therefore prayed that Ld. A.O be ordered to delete the staid addition. Further the Ld. A.O. has emphasized in the assessment order that the explanation 2 added to Sec 195 by amendment introduced by Finance Act 2012 with retrospective effect from 01.04.1962 leaves no doubt about chargeability of the income paid to non resident agent. The explanation 2 reads as under: For the removal of doubts, it is hereby clarified that the obligation to comply with sub-section(l) and to make deduction there under applies and shall be deemed to have always applied & extends and shall be deemed to have always extended to all persons resident or non-resident, person has- (I) a residence or place of business connection in India; or (ii) Any other presence in any manner whatsoever in India. To our mind, the Ld. A.O has made a grave error of law in interpreting the above explanation 2 added by Finance Act 2012. This explanation has only added a further fiction in respect of person making the payment to non-resident and not the person receiving the payment i.e. non-resident (Foreign Agent) who is receiving the payment. To clearly understand Sec.195, it can be divided into three limbs:- a) Firstly any person responsible for paying to non- resident not being company i.e the assessee in appeal. b) Secondly there has to be payment of any other some chargeable under the provisions of the Act. c) Thirdly the recipient of the payment has to be non- resident (i.e. Foreign Agent in our case). So there is no denial to the fact that the appellant is the person as stated in limb “a” above and so as per Sec. 195(1) of I.T Act he is under obligation to deduct tax on payment made to non-resident provided the payment is chargeable to tax as laid in clause "b".This explanation is only trying to clarify the person who is obliged to comply with sub sec (1) & to make deduction there under. Thus the obligation to deduct tax shall extend to all persons, resident or non-resident, whether or not the non-resident person has- Page | 12

ITO Vs Kulbeer Singh ITA No. 5204/Del/2014 (Assessment Year: 2010-11 (i) A resident or place of business connection in India; or (ii) Any other presence in any manner whatsoever in India. In a way it is only to define & clarify the opening words of sec195(1) which reads “any person responsible for paying to non resident”. So it is only defining the person responsible for paying to non-resident & not the payee i.e. the non resident to whom the payment is being made. The explanation nowhere suggests anything about recipient of the payment i.e. non-resident foreign agent. More over it won‟t be out of context to mention *here that the amendment by Finance Act, 2012 by adding explanation 2 was a consequential amendment to cover the judgment of Supreme Court in the case of Vodafone where in they had denied the applicability of the provisions of sec 195 as the company was non-resident & having no place of business or business connection in India or another presence in any manner whatsoever in India. As such the explanation is only trying to clarify about the applicability of sec 195 even if the person making the payment (and not the person receiving the payment) is resident or non resident and whether or not the such non-resident person (i.e. the person making the payment) has (i) A resident or place of business connection in India; or (ii) Any other presence in any manner whatsoever in India. The explanation is no where stating even by any stretch of imagination that the receipt in hands of Foreign Agent shall become income chargeable to tax irrespective of business connection or service rendered in India directly or through an agent. From above submission it is amply clear that the amendment has been wrongly interpreted. The court ruling as stated above still hold good and the provisions of the Sec 195 are applicable only if payment made to is chargeable to tax in

ITO Vs Kulbeer Singh ITA No. 5204/Del/2014 (Assessment Year: 2010-11 India in the case of non-resident recipient. That not being so, the provisions of sec 195 are not applicable and hence there was no obligation on the part of appellant to deduct TDS and thus the disallowance as made is not as per law and same needs to be deleted. The Ld. AR further submitted that the Ld.A.O mainly relied upon the Circular No.7/2009 dated 22/10/2009, wherein they have been withdrawn the earlier Circular No. 23 and 786 issued by the CBDT. The Ld. A.O has further relied upon the Advance Ruling in the case of SKF Boilers & Driers (P) Ltd. wherein it has been held that withholding of tax is mandatory u/s 195 of Income Tax Act, 1961 on export commission to Non-Resident agent, since commission is deemed to accrue and arise in India. The impact of withdrawal of earlier Circular No.23 dated 23/07/1969 and Circular No.786 dated 07/02/2000 came for adjudication before the ITAT DELHI BENCH “A” in the case of DY. Commissioner Of Income Tax Circle 1(1) ,New Delhi V/S Angelique International Ltd. Wherein it has been clearly upheld that the withdrawal of Circular No.23 & 786 wide Circular No. 7 of 22/10/2009 does not have any impact on non deduction of TDS to foreign agents. Similar view has been taken by same Bench in the case of Allied Nippon Ltd. Vs. Dy. Commissioner of Income Tax, Circle-1 (1), New Delhi. The Ld. A.O has further referred to the recent decision of Authority for Advance Ruling in the case of SKF Boilers & Driers (P) Ltd. The main contention of AAR in holding the commission paid by SKF Boilers and Driers Pvt. Ltd. as income accruing in India has been that the place of accrual of income is to be determine with respect to time of his accrual. While it is true that the point of time when commission arises is the time when the export of goods takes place, the AAR in SKF Boilers & Driers case erred in taking the view that even the situs of accrual of the income was the place from where the goods were exported. Under tax laws in India, it has been generally accepted that the place where the work is actually done is normally the situs of accrual of the income. For instance, in the case of salary income, the place of rendering of services is regarded as the place of accrual of income. The Page | 14

ITO Vs Kulbeer Singh ITA No. 5204/Del/2014 (Assessment Year: 2010-11 commission agent did not carry on any activity in India, and just the fact that the moment of accrual of income was linked to the moment of export of goods from India, did not mean that the commission income also accrued in India. The income from the export of goods was not the same as the income by way of commission. The linkage between the quantum or time of accrual between two events does not necessarily imply a linkage between the place of accrual of the two events. For instance, the value of a derivative is derived from its underlying fact, but the place of its accrual would be the place where the contract is entered into, and not the place where the delivery of the underlying goods takes place. The AAR seems to have mistaken the linkage between the two events vis-a-vis the moment of accrual, to also imply a linkage in the place of accrual. The AAR in the SKF Boilers & Driers case seems to have overlooked clause (a) of explanation 1 to section 9(1 )(i). This clause provides that in the case of a business of which all the operations are not carried out in India, the income of the business that is deemed under this clause to have accrued or arisen in India is only such part of the income as is reasonably attributable to the operations carried out in India. This clause supports the view that the Income Tax Act treats the place where the activity is carried out as a place of accrual of income. This effectively means that if a business is only partly carried out in India, only that part of the income attributable to the business activity carried out in India would be taxable in India. This position is further reiterated by explanation 3 to section 9(1 )(i) of the Act. That being the case, if no part of the business activity is carried out in India, as in the case of a foreign commission agent, then no part of the income can be taxed in India. Further, the Supreme Court, in the case of CIT v Toshoku Ltd 125 ITR 525, considered a situation where an Indian exporter had appointed a non resident sales agent for exports. The commission was credited in the books of the Indian exporter, and was subsequently paid. While holding that such credit did not constitute receipt of the commission in India, the Supreme Court also considered whether the commission

ITO Vs Kulbeer Singh ITA No. 5204/Del/2014 (Assessment Year: 2010-11 accrued or arose in India. The Supreme Court observed as under; “The second aspect of the same question is whether the commission amounts credited in the books of the statutory agent can be treated as incomes accrued, arisen, or deemed to have accrued or arisen in India to the non resident assessees during the relevant year. This takes us to section 9 of the Act. It is urged that the commission amounts should be treated as incomes deemed to have accrued or arisen in India as they, according to the department, had either accrued or arisen through and from the business connection in India that existed between the non-resident assessees and the statutory agent. This contention overlooks the effect of cl. (a) of the Explanation to cl. (i) of s/s (1) of section 9 of the Act, which provides that in the case of a business of which all the operations are not carried out in India, the income of the business deemed under that clause to accrue or in India shall be only such part of the income as is reasonably attributable to the operations carried out in India. If all such operations are carried out in India, the entire income accruing there from shall be deemed to have accrued in India. If however, all the operations are not carried out in the taxable territories, the profits and gains of business deemed to accrue in India through and from business connection in India, shall be only such profits and gains as are reasonably attributable to that part of the operations carried out in the taxable territories. If no operations of business are carried out in the taxable territories, it follows that the income accruing or arising abroad through or from any business connection in India cannot be deemed to accrue or arise in India. In the instant case, the non resident assessee did not carry on any business operations in the taxable territories. They acted as selling agents outside India. The receipt in India of the sale proceeds of tobacco remitted or caused to be remitted by the purchasers from abroad, does not amount to an operation carried out by the assessees in India as contemplated by cl. (a) of the Page | 16

ITO Vs Kulbeer Singh ITA No. 5204/Del/2014 (Assessment Year: 2010-11 Explanation to section 9(1 )(i) of the Act. The commission amounts which were earned by the non-resident assessees for services rendered outside India cannot, therefore, be deemed to be incomes which have, either accrued or arisen in India." From the above decision of the Supreme Court, it is clear that in the absence of any activity being carried out in India by a non-resident commission agent, the commission does not accrue or arise in India, and is not taxable in India. A view similar to the view taken in the case of Avon Organics in favour of the assessee has been taken by the Hyderabad tribunal in the case of Priyadarshini Spinning Millls (P) Ltd. , 25 taxmann. com 574. The tribunal in this case took a view that no tax was deductible at source u/s. 195 on payment of such commission and that expenditure on commission could not be disallowed u/s. 40(a)(i) of the Act. In view of the discussion here, it is appropriate to hold that the said Circular No. 7 of 2009 is without the authority of the law and shall have no application in determining the taxability of income by way of commission in the hands of a foreign commission agent rendering services outside India. & also the Advance Ruling in the case of SKF Boilers & Driers Pvt. Ltd. is not warranted by the law as discussed above & no TDS needs to be deducted as commission paid to foreign agents. Accordingly it is prayed that Ld. A.O be ordered to delete the addition of Rs.4,41,40,860 made on account of non deduction of TDS. 5. I have carefully considered the submissions made by the Ld AR and have gone through the assessment order. 5.1 In this appeal, the appellant has effectively contested the disallowance of Rs. 4,41,40,860/- claimed as expenditure on account of export commission to non-resident u/s 40(a)(ia) of the Income Tax Act. It is noted that during the relevant assessment year, the appellant has exported fabric and general merchandise to M/s Mujib Sahal Baba Khel, Sarya Sargur, Kabul, Afghanisthan through the Commission Agents namely Mr Atiquallah and Mr.Amanullah. The appellant had entered into an agreement with Mr Atiquallah and Mr.Amanullah to act as intermediary for overseas sales of the Page | 17

ITO Vs Kulbeer Singh ITA No. 5204/Del/2014 (Assessment Year: 2010-11 product belonging to the appellant. The intermediary or the commission agents used to remit the sale considerations to the appellant net of commission. The Assessing Officer has observed in her order that the identity of the non resident commission agents are not clear in this case. However, it is noted that the aforesaid commission agents have given their complete addresses along with the copies of their passport wherein it has been recorded that they are the resident of Afghanistan. No material has been brought on record by the Assessing Officer to show that these persons are either non- existent or imaginary persons. In the absence of any contrary material on record, it cannot be said that the identity of commission agents are not clear. Further, the copies of export bills show that the exports were made by the appellant to the parties through the non-resident commission agents and payments were made to these commission agents outside India after netting off the export bills. The Assessing Officer has not brought any material on record to dispute the facts that either these commission agents have rendered any of their service in India or the payments has been made to them in India. In the assessment order, the Assessing Officer has further observed that even otherwise if the said commission agreements with the commission agents were held to be valid, then also the appellant was liable to deduct tax u/s 195 from the commission paid to these persons as the commission had been accrued or arisen to them in India. The aforesaid observation of the Assessing Officer clearly indicates that she had acted on conjuncture & surmises. No material evidence has been brought on record by her to show that these commission agents had either any business connection in India or they have rendered any services in India or having any activity in India or the commission has been accrued or arisen in India. Merely because the orders were procured by the appellant through these commission agents does not prove that the income by way of commission has been accrued or arisen to these non-resident commission agents in India. Further, confirmation from the commission agents regarding receipt of commission outside India from the appellant was filed before the Assessing Officer, but the Assessing Officer has not rebutted with cogent material evidence about the genuineness of the commission paid to these agents. It is further observed that the Assessing Officer has not brought Page | 18

ITO Vs Kulbeer Singh ITA No. 5204/Del/2014 (Assessment Year: 2010-11 any material on record to show that the non resident commission agents have rendered any services in India for earning the commission income from the appellant. 5.2 Section 195 of the Income tax Act requiring to deduct tax on foreign payments i.e. sum paid by Resident to Non Resident, comes in to force only when the payment made to the Non resident is his income chargeable under Indian Income tax Law. Therefore, TDS liability on such commission is an offshoot from its chargeability to Income tax under Section 5(2) of the Act. 5.3 Section 195 of the Income-Tax Act, 1961 reads as follows “ (1) Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest 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 : Explanation.—For the purposes of this section, where any interest or other sum as aforesaid is credited to any account, whether called “Interest payable account” or “Suspense account” or by any other name, in the books of account of the person liable to pay such income such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly. (2) Where the person responsible for paying any such sum chargeable under this Act (other than salary) to a non-resident considers that the whole of such sum would not be income chargeable in the case of the recipient, he may make an application to the Assessing Officer to determine, by general or special order, the appropriate proportion of such sum so chargeable, and upon such determination, tax shall be deducted under

ITO Vs Kulbeer Singh ITA No. 5204/Del/2014 (Assessment Year: 2010-11 sub-section (1) only on that proportion of the sum which is so chargeable. Thus, under Section 195 of the Income-tax Act, 1961, an obligation is cast on a person making payment to a non- resident of any sum, which is chargeable under the provisions of the Act, to deduct tax at the rates in force, at the time of payment of such sum or at the time of credit thereof to the account of the payee, whichever is earlier. As per the aforesaid provision, tax is required to be withheld in respect of payments made to a non-resident only if such payment is chargeable to tax in India. The Hon‟ble Supreme Court in the case of GE India Technology Centre (P) Ltd vs. CIT, 327 ITR 456, explaining its earlier decision rendered in the case of Transmission Corporation of AP v. CIT: 239 ITR 587, held that only if the income is chargeable to tax in India in the hands of the non-resident recipient, would tax be required to be deducted at source from such payment. Various Courts and Tribunals have, in the below mentioned cases, held likewise: a. Van Oord ACZ India (P) Ltd. vs. CIT : [(2010) 323 ITR 130 (Del)] b. CIT vs. Estel Communications (P) Ltd. : [(2009) 318 ITR 185 (Del)] c. CIT vs. ICL Shipping Ltd. : [(2009) 315 ITR 195 (Mad)] d. Jindal Thermal Power Co. Ltd. vs. DCIT: [(2010) 321 ITR 31 (Kar)]. e. CIT vs. Manager, State Bank of India : [(2010) 323 ITR 93 (Raj)] f. ITO (International Taxation) vs. Prasad Production Ltd.: [(2010) 129 TTJ 641 (SB)(Chennai)] g. Mahindra & Mahindra Ltd. vs. DCIT: [(2009) 313 ITR (AT) 263 (SB)(Mum)] 22 DTR (TRIB) 361] 122 TTJ (Mumbai)(SB) 577 :applied. It is, therefore, imperative to first analyze whether the commission paid by the appellant to the commission agent is chargeable to tax in India. Only if the answer to Page | 20

ITO Vs Kulbeer Singh ITA No. 5204/Del/2014 (Assessment Year: 2010-11 the said question is in the affirmative, then the provisions relating to withholding tax under section 195 of the Act shall be applicable. As per section 5(2) of the Act, a non-resident is liable to be taxed in India in respect of, (a) income which is received or is deemed to be received in India in such year by or on behalf of such person; or (b) income which accrues or arises or is deemed to accrue or arise in India during such year. Section 5(2), the charging section for taxing non resident income provides for two conditions. First condition of receipt of income in India is ruled out in this case of the appellant, as the non resident agents have not received the commission in India, so it cannot be said that they have received any income in India .However the second condition viz., income accrues or arisen or deemed to accrue or arise requires further elaboration. Further, Section 7 of the Income Tax Act lists the income which is deemed to be received in India and this does not include commission income. Therefore, it can also not be said that the impugned commission income has accrued or arisen to the Non Resident agents in India.The aforesaid commission payment may, however, be deemed to accrue or arise in India under - (i) section 9(1 )(i) of the Act if the commission agent has a „business connection‟ in India and the income arises through such 'business connection‟ or (ii) section 9(1 )(vii) of the Act if the services rendered by the commission agent could be characterized as defined in Explanation 2 to that section. Provisions of section 9(1 )(i) read with explanation reveals that in case of a business of which all the operations are not carried out in India, only such part of the income as is reasonably attributable to the Page | 21

ITO Vs Kulbeer Singh ITA No. 5204/Del/2014 (Assessment Year: 2010-11 operations carried out in India shall be deemed to accrue or arise in India and thus be taxable in India. If no operations of the business are carried out in India, it follows that the income accruing or arising outside India through or from any business connection in India cannot be deemed to accrue or arise in India. The Business connection will, however, not include cases where the business activity is carried out through a broker, general commission agent or any other agent having an independent status, if such person is acting in the ordinary course of his business and rendering services outside India. The concept of „business connection was dealt with in the decision of Hon‟ble Supreme Court of India in the case of CIT vs. R.D. Aggarwal & Co. & Anr. (1965) 56 ITR 20* (SC) wherein the Apex Court held that a Business Connection “involves a relation between a business carried on by a non resident which yields profit or gains and some activity in the taxable territories which contributes directly or indirectly to the earning of those profits or gains. It predicates an element of continuity between the business of the non-resident and the activity in the taxable territories‟”. It is noted that in the case of the appellant, there is no dispute that the non resident commission agents have rendered services outside India for promotion of sales of Fabric or general merchandise exported by the appellant. The commission retained by the non-resident agent, therefore, did not arise on account of any „Business connection‟ of the commission agent in India and cannot, therefore, be deemed to accrue or arise in India under section 9(1 )(i) of the Act. Reliance in this regard is placed the decision of the Hon‟ble Supreme Court in the case of CIT v. Toshuku Ltd: 125 ITR 525, wherein the apex Court held that the commission amounts which were earned by the non-residents for services rendered outside India could not be deemed to be income, which had accrued or arisen in India in terms of section 9(1 )(i) of the Act. The relevant observations of the apex Court are as under: “In the cases before us, there were no terms corresponding to the term extracted above which was Page | 22

ITO Vs Kulbeer Singh ITA No. 5204/Del/2014 (Assessment Year: 2010-11 found in the agreements between the assessee and the Japanese company in Raghava Reddi's case [1962] 44 ITR 720 (SC). It cannot be said that the making of the book entries in the books of the statutory agent amounted to receipt by the assessees who were non- residents as the amounts so credited in their favour were not at their disposal or control. It is not possible to hold that the non-resident assessees in this case either received or can be deemed to have received the sums in question when their accounts with the statutory agent were credited, since a credit balance, without more, only represents a debt and a mere book entry in the debtor's own books does not constitute payment which will secure discharge from the debt. They cannot, therefore, be charged to tax on the basis of receipt of income actual or constructive in the taxable territories during the relevant accounting period. The second aspect of the same question is whether the commission amounts credited in the books of the statutory agent can be treated as incomes accrued, arisen, or deemed to have accrued or arisen in India to the non-resident assessees during the relevant year. This takes us to s. 9 of the Act. It is urged that the commission amounts should be treated as incomes deemed to have accrued or arisen in India as they, according to the department, had either accrued or arisen through and from the business connection in India that existed between the non-resident assessees and the statutory agent. This contention overlooks the effect of cl. (a) of the Explanation to cl. (i) of sub-s. (1) of s. 9 of the Act which provides that in the case of a business of which all the operations are not carried out in India, the income of the business deemed under that clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India. If all such operations are carried out in India, the entire income accruing there from shall be deemed to have accrued in India. If however, all the operations are not carried out in the taxable territories, the profits and gains of business deemed to accrue in India through and from business Page | 23

ITO Vs Kulbeer Singh ITA No. 5204/Del/2014 (Assessment Year: 2010-11 connection in India shall be only such profits and gains as are reasonably attributable to that part of the operations carried out in the taxable territories. If no operations of business are carried out in the taxable territories, it follows that the income accruing or arising abroad through or from any business connection in India cannot be deemed to accrue or arise in India (See CIT v. R. D. Aggarwal and Co. [1965] 56 ITR 20 (SC) and Carborandum Co. v. CIT [1977] 108 ITR 335 (SC) which are decided on the basis of s. 42 of the Indian I.T. Act, 1922, which corresponds to s. 9(1 )(i) of the Act). In the instant case, the non-resident assessees did not carry on any business operations in the taxable territories. They acted as selling agents outside India. The receipt in India of the sale proceeds of tobacco remitted or caused to be remitted by the purchasers from abroad does not amount to an operation carried out by the assessees in India as contemplated by cl. (a) of the Explanation to s. 9(1 )(i) of the Act. The commission amounts which were earned by the non-resident assessees for services rendered outside India cannot, therefore, be deemed to be incomes which have either accrued or arisen in India. The High Court was, therefore, right in answering the question against the department. For the foregoing reasons, the appeals fail and are hereby dismissed with costs”. The Hon‟ble Delhi High Court in CIT v. EON Technology (P) Ltd (supra), following the decision of the Apex Court in Toshuku (supra), held that export commission earned by the non-residents for services rendered outside India could not be deemed to be income which had either accrued or arisen in India in terms of section 9(1 )(i) of the IT Act. Further, in the case of Spahi Projects P. Limited.,315 ITR 374 (AARj, the Authority for Advance Rulings („AAR‟), after considering the provisions of section 9(1 )(i) of the Act, held that commission paid to an agent in South Africa for distribution of the products of the applicant in South Africa was not chargeable to tax in India. On similar facts, In an another case namely Ind Telesoft P. Page | 24

ITO Vs Kulbeer Singh ITA No. 5204/Del/2014 (Assessment Year: 2010-11 Ltd, IN RE (543 of 2001),the AAR held that for payment of commission thereon to non-resident companies for securing business outside India, there is no liability to deduct tax at source under the Indian Income Tax 1961. It has been likewise held in the following decisions - i. DCIT vs. Angelique International Ltd. [(2013) 55 SOT 226 (Delhi)] (confirmed by the Hon‟ble Delhi High court in ITA No 280/2013 dated 23.09.2013). „„Commission paid to a non-resident agent for services rendered outside India is not chargeable to tax in India and that hence, no disallowance can be made under s. 40(a)(ia). Where the relationship between the assessee and its non¬resident agents is on a principal to principal basis, sales commission paid to non- residents for sen/ices rendered outside India could not be deemed to be income accrued or arise in India. ” ii. ACIT vs. v'riyadarshini Spinning Mills (P.) Ltd. [2013] 55 SOT 432 (Hyderabad) / [2012] 25 taxmann.com 574 (Hyd.) JULY 6, 2012 „„Section 195, read with section 40(a)(i), of the Income-tax Act, 1961 - Deduction of tax at source - Payments to non-resident - Assessment year 1998- 99 - Whether where foreign agents were appointed to act as a selling agents of assessee outside India, commission earned by them for services rendered by them outside India could not be considered as income chargeable to tax in India - Held, yes - Whether therefore, when commission paid to non- residents were not chargeable to tax under provisions of Act, no deduction of tax was required to be made under section 195(1) warranting disallowance under section 40(a)(i) - Held, yes" iii. ITO v. M/s. Faizan Shoes Pvt. Ltd in ITA No. 2095/MDS/2012 dated 23,04.2013 “ 6. “On going through the order of the Commissioner of Income Tax (Appeals), we find that the non-residents are only procuring orders for Page | 25

ITO Vs Kulbeer Singh ITA No. 5204/Del/2014 (Assessment Year: 2010-11 the assessee and following up payments, no other services are rendered other than procuring the orders and collecting the amounts. The non- residents are not providing any technical services to the assessee. The commission payment made to non-residents also does not fall under the category of royalty or fee of technical services, therefore the Explanation to sub-section (2) of section 9 has no application to the facts of the assessee‟s case. We see that this case is squarely covered by the decision of the Supreme Court in the case of GE India Technology Cen. P. Ltd. Vs. CIT (327 ITR 456) wherein the Hon‟ble Supreme Court held that the assessee is not liable to deduct TDS when non- residents provided service outside India . It was held that when the services are provided outside India, the commission payments made to non- residents cannot be treated as income deemed to accrue or arise in India, therefore, the provisions of section 195 has no application. In order to invoke the provisions of section 195 of the Act, the income should be chargeable to tax in India. Here the commission payments to non-residents are not chargeable to tax in India and therefore the provisions of section 195 are not applicable. In the circumstances, we sustain the order of the Commissioner of Income Tax (Appeals) in deleting the disallowance made under 40(a)(i) of the Act.” iv. ACIT vs. T. Abdul Wahid & co (2014) 46Taxmann.com,(Chennai ) wherein it was held that “Agency/sales commission payment to Non resident agents for services outside India is not tax deductable at source and outside the purview of section 40(a)(ia).” v. AIA Engineering Ltd. vs. Addl. CIT (2012) 50 SOT 134 (Ahmedabad) vi. ACIT vs. Modern Insulator Ltd. [ (2011) 140 TTJ (JP) 715 vii. ACIT v. Nidhi Exports: ITA No. 626/Del./2012. Page | 26

ITO Vs Kulbeer Singh ITA No. 5204/Del/2014 (Assessment Year: 2010-11 viii. ACIT v. M/s Ram Gopal & Sons: 2012 (7) TMI 479 ix. ACIT v. Avon Organics Ltd.: 2012 (12) TMI 691 x. CIT vs Model Exims (2013) 358 ITR 0072 (All.) Thus, on the basis of the aforesaid decisions, the legal position which emerges is that income earned by a non- resident foreign agent for procuring orders from a source outside India cannot be deemed to be income accruing or arising in India for the purposes of section 9(1 )(i) of the Act.Therefore, I am of the opinion that the commission paid by the appellant to the agents for services rendered outside India cannot be deemed to be income which has accrued or arisen in India in terms of section 9(1 )(i) of the Act. 5.3 The A.O. has mentioned in the Assessment Order that there was liability on the appellant to deduct TDS u/s 195 from the commission paid to foreign agents as the commission income has accrued to such foreign agents in India, But it is observed that she has failed to rebut the claim of the appellant that the commission agents had no business connection in India. In this connection, no material evidence has been brought on record by the A.O. to show that the commission agents had any business connection in India. On the contrary, the appellant has submitted the confirmations from the commission agents, which shows that they are residents of Afghanistan and they have no permanent Establishment or business connection in India. The AO has not controverted the confirmation of the foreign commission agents. No adverse material has been brought on record by the AO to prove that the confirmation given by the commission agents are factually incorrect. 5.4 The A.O. has relied upon the decision of Delhi Bench of Tribunal in the case of Asia Satellite Telecommunications Company Ltd. vs. DCIT [(2003) 85 ITD 478 (Delhi)] and has held that since the payment to non resident agents have been made for commission which is originating in Page | 27

ITO Vs Kulbeer Singh ITA No. 5204/Del/2014 (Assessment Year: 2010-11 India due to the Indian goods, so the commission income is attributable to the operations carried in India. In his regard, it is observed that the facts and the ratio of the above mentioned decisions are totally different from those of the appellant and thus no assistance whatsoever can be derived by the AO. Moreover, this order of the Hon‟ble ITAT has been reversed by the Hon‟ble Delhi High Court in the case of Asia Satellite telecommunications Co. Ltd. Vs. Director of Income Tax (2011) 322 ITR 140 (Del) wherein the Hon‟ble High Court of Delhi has held that In order for income to be taxable u/s 9(1) (i), the carrying on of operations in India is a sine qua non. As discussed earlier, in the present case, the commission agents have no business connection in India, therefore, their income from commission cannot be deemed to be income accruing or arising in India for the purposes of section 9(1 )(i) of the Act. 5.5 The Assessing Officer has also relied upon the decision of Hon'ble ITAT, Delhi, in the case of Lufthansa Cargo India Pvt Ltd. vs DCIT (2005) 274 ITR 20 in support of her contention. However, it is noted that the aforesaid ratio of decision has been based on the different facts and circumstances from the case of the appellant. The aforesaid decision as rendered in respect of section 9(1 )(vii)(B) read with section 201(1 A) of the Income Tax Act. Moreover the aforesaid decision was rendered in the favour of the assessee and not in the favour of revenue. Therefore, in my opinion, the aforesaid ratio of decision in the case of Lufthansa Cargo India Pvt Ltd. (supra) is not applicable to the facts of the case of the appellant. 5.6 The A.O. has further mentioned in the assessment order that since, CBDT has withdrawn its Circular No. 23 and 786, therefore the commission remitted to non- resident to foreign agents become chargeable to tax in India. In this regard it is observed that the circulars issued by the Board were reiterating the position of law and therefore, the withdrawal of circulars does not mean that the position of law which was always there like that has undergone any change. This aspect of withdrawal of circular and its effect on the allow ability of foreign Page | 28

ITO Vs Kulbeer Singh ITA No. 5204/Del/2014 (Assessment Year: 2010-11 commission has been explained by Hon‟ble Bangalore Bench of Tribunal in the case of Exotic Fruits Pvt. Ltd. vs. ITO [in ITA 1008 to 1013/Bang./2012, Date of order 04- 10-2013] , according to which even after the withdrawal of the said circulars, foreign agents‟ commissions paid in the above circumstances do not become income chargeable to tax in India.In this judgment Hon‟ble bench has considered a crucial fact about the withdrawal of circular by the Central Board of Direct Taxes (CBDT) i.e. Circular No. 23 dated 23-07-1969 and even after the withdrawal it was held that TDS was not required to be deducted on the payments of commission made to foreign agents abroad. Relevant Para is reproduced below for ready reference:- “Para 7.2-.... we have noticed that none of the assessee's agents based abroad have rendered any services in India. Admittedly, none of the assessee's agents have their offices or business establishments in India for rendering such services to the assessee. The commissions to such agents have been paid not in India but overseas. Since no part of the services was rendered by such agents in India, no income arose on the payment of commissions to such agents and, consequently, as rightly argued by the learned AR, the question of deduction of tax at source u/s 195 of the Act doesn't arise.” Para 7.5: “The CBDT vide Circular No. 7 of 2009 dtd. 22.10.2009 has withdrawn the Circular No. 23/1969 with retrospective effect. In the Circular No.23 of 1969, CBDT clarified that the payment made to non- resident commission agents was not liable to income-tax in India. Such clarification of CBDT was based on the provisions of sections 5, 7, 9, 195 and other relevant provisions of the Act. The question for consideration is when there is no relevant change in sections 5, 7, 9, 195 then as to how the withdrawal of Circular No.23 of 1969 of CBDT will make the commission paid to such non¬resident commission agents taxable in India. I am of the considered view that even after the withdrawal of Circular No.23 of 1969, the position will remain the Page | 29

ITO Vs Kulbeer Singh ITA No. 5204/Del/2014 (Assessment Year: 2010-11 same i.e., the commission paid to non-resident agents is not liable to tax under the provisions of I.T. Act when the services were rendered outside India, services were used outside India, payments were made outside India and there was no permanent establishment or business‟ connection in India. It cannot be accepted that by virtue of CBDT Circular No.23/1969, the commission paid to non-resident agents become not liable to income-tax in India and on such withdrawal of Circular by the CBDT, such commission paid to non-resident agents become liable to income-tax in India. Irrespective of Circular issued by CBDT, the question of taxability of such commission to income tax has to be decided as per the provisions of section 9(1) of the Act. I am of considered view that the provisions of sec. 9(1) are not applicable to the commission paid to such non-resident agents. Such income (commission) in the hands of non-resident commission agents did not accrue or arise directly or indirectly, through or from any business connection in India. Such income to the non- resident commission agents did not accrue or arise in India through or from any property in India or through the transfer of capital asset situated in India. In the facts and circumstances the provisions of sec. 9(1) were not applicable to such payment of commission by appellant to non-resident agents “ Para 7.7-“ in the absence of permanent establishment(s) of such agents in India, the incomes of the said agents were NOT liable to be taxed in India and, as such, the assessee was not obliged to effect any deduction of tax on the commission payments made to the agents who were positioned overseas. ” In another judgement, the Hon‟ble Income Tax Appellate Tribunal in the case of Gujarat Reclaim & Rubber Products Ltd. vs. Addl. DIT dated 19 April, 2013 [2013] 35 taxmann.com 587 (Mum) —Trib ] has also considered the issue of withdrawal of circular by the Central Board of Direct Taxes (CBDT) i.e. Circular No. 23 dated 23-07-1969 and even after the withdrawal it was held that TDS was not required to be deducted on the Page | 30

ITO Vs Kulbeer Singh ITA No. 5204/Del/2014 (Assessment Year: 2010-11 payments of commission made to foreign agents abroad. Relevant Para is reproduced below:- “The CBDT vide Circular No. 7 of 2009 dated 22.10.2009 has withdrawn the Circular No.23/1969 with retrospective effect. In the Circular No.23 of 1969, CBDT clarified that the payment made to nonresident commission agents was not liable to income-tax in India. Such clarification of CBDT was based on the provisions of section 5, 7, 9, 195 and other relevant provisions of the Act. The question for consideration is when there is no relevant change in sections 5, 7, 9, 195 then as to how the withdrawal of Circular No.23 of 1969 of CBDT will make the commission paid to such non-resident commission agents taxable in India. I am of considered view that even after the withdrawal of Qircular No.23 of 1969, the position will remain the same i.e. the commission paid to non¬resident agents is not liable to tax under the provisions of the I. T. Act when the services were rendered outside India, services were used outside India, payments were made outside India and there was no permanent establishment or business connection in India. It cannot be accepted that by virtue of CBDT Circular No.23/1969, the commission paid to non-resident agents become not liable to income-tax in India and on such withdrawal of Circular by the CBDT, such commission paid to non-resident agents become liable to income-tax in India. Irrespective of Circular issued by CBDT, the question of taxability of such commission to income-tax has to be decided as per the provisions of section 9(1) of the Act. I am of considered view that the provisions of sec. 9(1) are not applicable to the commission paid to such non- resident agents. Such income (commission) in the hands of nonresident commission agents did not accrue or arise directly or indirectly, through or from any business connection in India. Such income to the non- resident commission agents did

ITO Vs Kulbeer Singh ITA No. 5204/Del/2014 (Assessment Year: 2010-11 not accrue or arise in India through or from any property in India or through the transfer of capital asset situated in India, In the facts and circumstances the provisions of sec. 9(1) were not applicable to such payment of commission by appellant to non¬resident agents. ” In a recent decision dated 23.05.2014, in the case of ACIT vs Rapid Pack Engineering Pvt Ltd., the Hon'ble ITAT, Mumbai, has considered the withdrawal of circular No 786 by the Circular No 7 of 2009 dated 22.10.2009, and held that the Circular No. 7 of 2009 did not have retrospective effect, even otherwise at the time of remittance of the amount in question, circular No. 786 was very much in force and existence, and the assessee cannot be expected to deduct tax at source on the commission paid to a non resident agent. In the present case also, at the time of making payment of commission circular No 786 dated 07.02.2000 was very much in existence and therefore circular No.7 of 2009 will not have any retrospective operation. Further reliance in this regard is placed on the decision of Hon'ble High Court of Delhi in the case of CIT vs Angelique International Ltd. wherein similar observations were made by the Hon'ble Court. Therefore, in my opinion, withdrawal of circular No 23 dated 23.07.1969 and circular No 786 dated 07.02.2000 will not affect the case of the appellant. 5.7 The A.O. has also relied upon the ruling of AAR in the case of M/s SKF Boilers and Driers P. Ltd. 343 ITR 385 (AAR) wherein it was ruled that commission paid td agents outside India is deemed to accrue and arise in India under section 5(2)(b) read with section 9(1 )(i) of the IT Act. However, On a careful perusal, it appears that in the aforesaid case, Section, 9(1 )(i) was applied without examining the concept of „business connection‟. In this context, the term „business connection‟as defined in Explanation 2 to Section 9(1) would mean: “any business activity carried out through a person who, acting on behalf of the non-resident —

ITO Vs Kulbeer Singh ITA No. 5204/Del/2014 (Assessment Year: 2010-11 (a) has and habitually exercises in India, an authority to conclude contracts on behalf of the non-resident, unless his activities are limited to the purchase of goods or merchandise for the non- resident; or (b) has no such authority, but habitually maintains in India a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the non-resident; or (c) habitually secures orders in India, mainly or wholly for the non-resident or for that non-resident and other non-residents controlling, controlled by, or subject to the same common control, as that non- resident: Provided that such business connection shall not include any business activity carried out through a broker, general commission agent or any other agent having an independent status, if such broker, general commission agent or any other agent having an independent status is acting in the ordinary course of his business” Thus, Section 9(1 )(i) provides that income arising out of „business connection' is chargeable to tax in India only to the extent of income reasonably attributable to the operations carried out in India. It may be noted that for invoking Section 9(1 )(i), existence of business connection (Permanent Establishment) is a sine qua non and inevitable. It also appears that in the aforesaid ruling, the earlier ruling of the AAR in the case of Spahi Projects (supra) has not been considered and therefore it cannot be said to be per incuriam. Further, in this case, the decision of the Hon‟ble apex Court in the case of Toshuku (supra) has also been not considered. Therefore, the finding of the AO that right to receive commission arises in India when the order is executed by the person resident in India is, in my view, not correct since the mere fact that payment is made by a person resident in India or the order is executed by a person resident in India does not result in establishment of business connection of the non- resident payee. It is also observed that the SKF Boilers ruling Page | 33

ITO Vs Kulbeer Singh ITA No. 5204/Del/2014 (Assessment Year: 2010-11 was decided ex-parte, without any representation from the side of the assessee and, therefore, the binding precedents, it appears, were not noticed/ considered by the AAR. It is further noticed that the rulircg of the AAR in SKF Boilers is based on the ruling in the case of Rajiv Malhotra, [(2006) 284 ITR 564 (AAR)] .According to the. A.O. the said decisions lay down that tax deduction was mandatory on export commission since commission was deemed to accrue or arise in India. Flowever, it is observed that the facts of the above ruling are entirely different from those of the appellant. In the case of Rajiv Malhotra, the commission was payable to non- resident agent for soliciting foreign participants abroad for a trade exhibition to be held in India. Therefore in view of specific provisions of s. 5(2) (b) r/w s. 9(1 )(i) as the right to receive the commission under the terms of the agency agreement had arisen in India, the commission was held be taxable in India under the provisions of the act. But in the appellant‟s case, the facts are entirely different. In this case, the appellant has paid foreign commission to Non Resident for commission due on export orders procured by them. These foreign commission agents are not resident in India. These agents operate their activities outside India in their own country and no part of their activities arises in India. They are paid commission which relates to services provided to the appellant from outside India .The relation between appellant and the agent are principal to principal. These agents do not have permanent establishment or permanent place of business place In India. The commission is remitted directly to these agents directly outside India and not received by them or on their behalf in India by any third party (or by them). Moreover, the AAR in the case of Ind Telesoft P. Ltd. 267 ITR 725 have held that tax was not required to be deducted out of foreign agents‟ commission. In that view of the matter, the decision of the AAR in SKF Boilers cannot, in my opinion, be said to be a binding precedent. In the case of CIT vs. EON TECHNOLOGY (P) LTD. [(2012) 343 ITR 366 (Delhi)], the Hon‟ble Delhi High Court has held that “When a non-resident agent operates outside the country no part of his income arises in India, and since payment is remitted directly abroad, and merely because an entry Page | 34

ITO Vs Kulbeer Singh ITA No. 5204/Del/2014 (Assessment Year: 2010-11 in the books of accounts is made, it does not mean that the non-resident has received any payment in India— Appellate authorities, on the basis of material on record, have rightly held that business connection is not established—Tax was not deductible at source and disallowance under s. 40(a)(i) was not called for." The judgment of Hon‟ble Delhi High Court is subsequent to the judgment in the case of Rajiv.Malhotra (AAR). Further the judgement of jurisdictional High Court has binding force. 5.8 On the basis of above mentioned facts and circumstances of the case, I am of the considered opinion that Commission payments to non-resident commission agents for export by the appellant does not represent income which is chargeable to tax under section 195 of the I.T act 1961 when analyzed under the framework of provisions of the Indian I.T Act. Hence, in my view, tax deduction at source was not required for said commission payments to non-resident agents and hence this expenses could not be disallowed u/s 40(a)(ia) of the Income Tax Act, 1961 .Therefore, the AO is directed to delete the impugned addition of Rs. 4,41,40,860/-.” 7. In the present case, the commission is paid to the two parties for export sales. The foreign agents are non-resident and the services have been rendered undisputedly by them outside India. The commission payment was also supported by the copy of the agreement and confirmation of commission paid. The copy of the passport of the commission agents were also submitted along with the party wise and invoice wise details resulting into payment of commission. Therefore it is not the case that the payment has been made to on identified parties. Further, The revenue has not brought any material on record to show that Page | 35

ITO Vs Kulbeer Singh ITA No. 5204/Del/2014 (Assessment Year: 2010-11 either of these commission agents has rendered any of their services in India and the payments have been made to them in India. In view of the finding of the learned Commissioner appeals, we are of the opinion that the income of the foreign agents is not chargeable to tax in India, as they do not have any „business connection‟ as per provisions of section 9 of the income tax act. In absence of any business connection, the income is not chargeable to tax under section 5 of the income tax act of the non-resident foreign agents. Therefore, the natural consequences is that on such payment assessee is not obliged to deduct tax at source under section 195 of the income tax act. The learned Commissioner of income tax appeals has relied upon the decision of the jurisdictional High Court in 343 ITR 366 wherein it has been held that when a non-resident agent operates outside the country no part of his income arises in India and since payment is remitted directly abroad and merely because an entry in the books of accounts of the assessee is made, it did not mean that non-resident has received any payment in India. Therefore, no business connection is established and income tax was not deductible at source and hence no disallowance is called for. In view of this, we do not find any infirmity in the order of the Page | 36

ITO Vs Kulbeer Singh ITA No. 5204/Del/2014 (Assessment Year: 2010-11 learned first appellate authority as it followed the decision of the jurisdictional High Court. Therefore, we dismiss the appeal of the learned assessing officer and confirm the finding of the Commissioner appeals. Accordingly, we direct learned assessing officer to delete the disallowance of Rs. 44140860 on account of commission paid to foreign agent who did not render any services in India. 8. Accordingly, appeal of the revenue is dismissed. Order pronounced in the open court on 03/10/2018. -Sd/- -Sd/- (AMIT SHUKLA) (PRASHANT MAHARISHI) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated:03/10/2018 A K Keot Copy forwarded to 1. Applicant 2. Respondent 3. CIT 4. CIT (A) 5. DR:ITAT ASSISTANT REGISTRAR ITAT, New Delhi