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Income Tax Appellate Tribunal, MUMBAI BENCH “C”, MUMBAI
Before: SHRI C.N. PRASAD, HONBLE & SHRI G. MANJUNATHA, HONBLE
O R D E R PER C.N. PRASAD (JM) 1. This appeal is filed by the Revenue against the order of the Ld. Commissioner of Income–tax (Appeals) -5, Mumbai [hereinafter in short “Ld.CIT(A)”] dated 19.04.2017 for the Assessment year 2013-14.
Revenue has raised the following grounds in its appeal: -
1. On the facts and in the circumstances of the case and in law, The Ld CIT(A) has erred in disallowance u/s 40(a)(i) of the commission paid to foreign agents without appreciating the fact that the right to receive the commission arose in india when the order was executed by the assessee and as such was deemed (A.Y: 2013-14) M/s. Indo Industries Ltd. to accrue and arise in india and was consequently taxable as per provision of section 5(2)(b) r.w.s 9(1) of the IT Act and the provision of sec. 195.
2. On the facts and circumstances of the case and in law, the Ld CIT(A) has erred in deleting the disallowance u/s 40(a)(i) of commission paid to foreign agents without deducting the tax at source, ignoring the decision of the Authority for Advance Ruling in the case of SKF Boilers & Driers Pvt Ltd. reported in 343ITR 385.”
At the outset, Ld. Counsel for the assessee submitted that the issue relates to commission paid to foreign agents and whether TDS u/s. 195 of the Act is liable to be deducted on such payments or not and this identical issue where same parties involved has been decided by the Coordinate Bench in assessee’s own case for the A.Y. 2012-13 in ITA.No. 4642/MUM/2016 dated 11.05.2018. Copy of the order is placed on record. Ld. Counsel for the assessee submitted that parties are identical even in the Assessment year under consideration. Therefore, he submits that in view of the order of the Tribunal for the A.Y 2012-13 the Revenue appeal is liable to be dismissed.
Ld. DR fairly submits that identical issue was decided in favour of the assessee for the A.Y. 2012-13.
We have perused the order of the Coordinate Bench of the Tribunal and find that the issue is squarely covered by the decision of the Coordinate Bench of this Tribunal in assessee’s own case for the A.Y. 2012-13 in ITA.No. 4642/Mum/2016 dated 11.05.2018 wherein the Tribunal considered the issue of whether the commission / brokerage paid
(A.Y: 2013-14) M/s. Indo Industries Ltd. to foreign agents is chargeable to tax in India thereby requiring the assessee to deduct the tax at source on such payment u/s. 195 of the Act and consequently whether there can be any disallowance u/s. 40(a)(ia) of the Act or not. The Tribunal considering the decision of the Hon'ble Supreme Court in the case of GVK Industries v. ITO [322 ITR 130] and the provisions of the Act, held that, the payments made by the assessee to non-resident agent is not liable for TDS u/s. 195 of the Act and consequently no disallowance is required to be made u/s. 40(a)(i) observing as under: -
“9. We have carefully considered the rival contentions and perused the materials on record. The basic issue which arises for consideration before us is, whether the commission/brokerage paid to foreign agents are chargeable to tax in India, thereby requiring the assessee to deduct tax at source on such payment in terms of section 195 of the Act. On a perusal of the impugned assessment order, it is evident that the Assessing Officer has accepted the fact that the assessee has paid commission/brokerage to persons/entities located outside India for booking export orders for the assessee. The reasoning of the Assessing Officer for disallowing the payment made is that such payment is chargeable to tax in India, as it falls within the purview of section 9(1)(i)/9(1)(vii) of the Act. At this stage, it will be relevant to look into certain provisions of the Act. Section 5 of the Act defines the scope of total income. Sub section (2) of section 5 says that the total income of a non resident of any previous year will include all income from whatever source derived, which is either received or deemed to be received in India or accrued or arises or is deemed to accrued or arise in India. Section 9 speaks of income deemed to accrue or arise in India. As per section 9(1)(i) of the Act, all income accruing or arising directly or indirectly through or from any business connection in India or through and from any property in India or through source of asset in India or through the transfer of capital asset situated in India, shall be deemed to accrues or arises in India. However, Explanation 1 carves out certain exceptions by providing that in the case of a business of which all the operations are not carried out in India, it shall be restricted to such part of the income as is reasonably attributable to the operations carried out in India. Explanation 2 to section 9(1)(i) of the Act defines business connection which means and includes any business activity carried out through a person who, acting on behalf of the non-resident, has and habitually exercises in India, an authority to conclude contracts on behalf of the non-resident; or 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 habitually secures orders in India, mainly or wholly for the non-resident. Thus from the reading of the aforesaid provision, it is clear that if any income is (A.Y: 2013-14) M/s. Indo Industries Ltd. received by a non resident through its business connection in India then it will be taxable in India. From the definition of the business connection as provided under Explanation 2 to section 9(1)(i) of the Act, it is very much clear that the nonresident agents to whom the assessee has paid commission/brokerage do not have any business connection in India. Further, the other conditions of section 9(1)(i) are also not applicable to the payments made by the assessee to non-resident agents. It is also a fact on record that none of the non-resident agents have permanent establishment in India. While making the disallowance u/s. 40(a)(i) of the Act, the Assessing Officer has placed strong reliance upon the decision of the Hon’ble Supreme Court in the case of GVK Industries (supra) and in fact to apply the said decision, the Assessing Officer has made attempt to rope in the payment made by the assessee u/s. 9(1)(vii). Therefore, at this stage, it is necessary to examine the nature of the payment made by the assessee to non-resident agents. As could be seen, the Assessing Officer himself at more than one place in the assessment order has recorded a finding of fact that the assessee has paid commission to foreign agents for booking/obtaining export orders. Thus, it is very much clear that the payment by the assessee is simply and purely in the nature of commission/brokerage for procuring export orders. Section 9(1)(vii) speaks of payment of fees for technical services. Applying the decision of the Hon’ble Supreme Court in the case of GVK Industries (supra), the payment made by the assessee to foreign agents under no circumstances can be brought within the term ‘fees for technical services’ as prescribed u/s. 9(1)(vii) of the Act. In fact, while examining identical nature of payment made by the assessee in assessment year 2010-11, the coordinate Bench in dated 14.11.2014 has clearly and categorically held that the commission/brokerage paid to non-resident agents cannot be termed as fees for technical services. That being the case, the reasoning of the Assessing Officer that the provisions of section 9(1)(vii) of the Act is applicable to the commission paid, is unacceptable.
As regards the argument of the department that the source rule applies to the payment made by the assessee, by relying upon the decision of the Hon’ble Supreme Court in the case of GVK Industries (supra), on a careful reading of the said decision it is crystal clear that the ratio laid down in the said decision cannot be applied to the facts of the present case. As could be seen from the facts of GVK Industries (supra) case the assessee therein wanted to set up a gas based power project to generate and sell electricity. For achieving the desired object, it went to utilize the expert services of qualified and experienced professionals who could prepare a scheme for raising the required finance and tie-up the required loan. For that purpose, it entered into an agreement with a non resident company who agreed to offer its services as financial advisor for the assessee’s project. The services included inter alia financial structure and security package to be offered to the lender, making an assessment of export credit agencies worldwide and obtaining commercial bank support on the most competitive terms, assisting the assessee’s loan negotiation and documentation with lender and structuring/negotiating and closing the financing for the project in a coordinate and expeditious manner. For the services rendered, the non resident company was to be paid at the rate of 0.75% of the total debt financing which is termed as “success fee”. The dispute between the assessee and the department was with regard to the nature of success fee and whether the assessee was required to deduct tax at source in terms of section 195 while making payment of success fee. The Hon’ble Supreme Court after examining the issue at depth as well as the nature of the payment made by the assessee held that success fee paid by the assessee to the (A.Y: 2013-14) M/s. Indo Industries Ltd. non-resident company is in the nature of fee for technical services as per section 9(1)(vii) of the Act. Having held so, the Hon’ble Supreme Court referring to the provisions of section 9(1)(vii)(b) of the Act as well as section 9(2) held that applying the source rule, the success fee paid to the non resident company is chargeable to tax in India. Facts are completely different in the appeal before us. In Assessing Officer’s own admission, the main business of the assessee is export of cotton yarn and the disputed payment is in the nature of commission paid to foreign agents for procuring orders in their respective countries of residences. That being the case, the payment is not in the nature of fee for technical services. Thus keeping in perspective, the aforesaid factual as well as legal position, it needs to be seen whether the provisions of section 195 are applicable. A reading of the said provision makes it clear that while making payment to a non resident, which is chargeable to tax in India, the assessee is required to deduct tax at source as per the said provision. In the facts of the present case, the commission paid to non- resident agents are not chargeable to tax in India either u/s. 9(1)(i) or under any other provisions of the Act since the non residents have no business connection in India or permanent establishment in India. That being the case, there was no liability on the assessee to deduct tax at source while paying commission to the non resident agent. Moreover, the provisions of section 9(2) of the Act are not applicable, as the payment made by the assessee are not of the nature as provided under clauses (v), (vi) and (vii) of section 9 of the Act. While dealing with identical issue in the assessee’s own case for assessment year 2010-11 in the co-ordinate Bench has held that the payment made to non- resident for services rendered outside India, is not chargeable to tax in India. Hence, the assessee was not liable to deduct tax at source on such payment. The same view was reiterated by the Tribunal while deciding assessee’s appeal for assessment year 2011-12 in ITA No. 1379/Mum/2015 dated 01.05.2015. Respectfully following the aforesaid decisions of the co-ordinate Bench, we uphold the order of the ld. Commissioner of Income Tax (Appeals) by dismissing the grounds raised
by the department.”
6. Respectfully following the same, we uphold the order of the Ld.CIT(A) and reject the grounds raised by the Revenue.
In the result, appeal of the Revenue is dismissed.
Order pronounced in the open court on the 30th January, 2019