ITO - 2(1)(2), MUMBAI vs. CITY CAT OVERSEAS CHEMICALS LTD., MUMBAI

The only issue in this appeal of Revenue is against the order of CIT(A) deleting the disallowance of expenses by the AO on account of non-deduction of TDS on commission paid to foreign agents, there by invoking the provisions of section 40(a)(ia) of the Act. For this Revenue has raised the following ground: -

Briefly stated facts are that the assessee has claimed the payment of commission as expense to foreign agent amounting to ₹ 2,27,36,600/-. The assessee is a hundred percent exporter of dyestuffs, iron and steel and other items. The AO required the assessee to explain as to why the TDS on the payments made to foreign agent commission be not deducted. The assessee before the AO explained that the agents are non-resident operating in their own respective countries and they procured the orders for the taxpayer from the parties outside India and the commission was paid to them outside India in foreign currency. The foreign agents did not have any business connection nor do they have any place of business in India. Therefore, commission income earned by the non-resident agent outside India has not deemed to accrue or arise in India and hence the said commission income was not taxable in India. The assessee’s (exporter) reserves the right of execution of order and / or cancels the order procured by the agent. The agents are not authorized to market the products of third party which are competing with those of the taxpayer. The assessee’s exporter relied on CBDT circular No. 23 and 786 which was subsequently been withdrawn by the CBDT Circular No. 7. Further, the assessee’s relying on the decision of the Bombay High Court in the case of BASF (India) ltd contended that the CBDT circular which was in force during the relevant AYs needs to be applied. The assessee’s (exporter) relying on the Bombay High Court’s decision in the case of Unit Trust of India contended that the subsequent withdrawal of the CBDT Circular will have no effect on the Circular issued and applicable in the relevant AY. The assessee’s (exporter) relying on the decision of Armayesh Global contended that the commission paid does not accrue or arise in India as the services were rendered outside India. Therefore provisions of section 195 of the act does not apply and consequently disallowance under section 40(a)(i) of the Act, cannot be made. The assessee’s (exporter) relying on the decision of the Delhi High Court in the case of EON Technologies P. Ltd contended that the commission paid by the Indian exporters to non-resident agents cannot be disallowed under Section 40(a)(i) of the Act. There was no dispute that the agent was not authorized to market the products of any third party and it does not have any business connection in India further their services were not utilized in India. Though the services were rendered outside India but the services were not utilized in India. When the assessee’s (exporter) was claiming that such payment of commission to non-resident agent was not liable for tax. There was no need to approach the tax department for obtaining tax withholding certificate. The commission income to non-resident agents was not received in India or was not accruing or arising in India whether directly or indirectly such income was also not accruing or arising to non-resident through or from any business connection in India since these non-resident agents were rendering services outside India and the payments were also made outside India. Income in the form of commission do not accrue or arise to those non-residents through or from any asset or sources of income in India or through transfer of capital asset situated in India. Accordingly, the provisions of section 9(1)(i) of the act were not applicable. The Mumbai tribunal in the case of Ardesh B. Cursetjee & sons ltd has held that the commission paid to non-resident agent outside India for services rendered outside India was not chargeable to tax in India. Such commission payment was not taxable in India as the conditions specified in section 9(1)(i) of the act were not fulfilled. Further section 9(1)(iii), (iv), (v)(vi), and (vii) of the act were also not applicable to the present case. The explanation to section 9(2) inserted by the Finance Act, 2010 with retrospective effect from 1 June 1976 was also not applicable since the said explanation was not applicable to section 9(1)(i) of the Act.

The above explanation was not accepted by the AO and he made disallowance of commission paid to foreign agents as ready to accrue/ arising in India and thereafter held that the TDS provision of 195(1) of the Act is applicable. Therefore, he applied the provision of section 40(a)(i) of the act. Aggrieved, assessee preferred the appeal before CIT(A).

The CIT(A) after relying on the decision of CIT(A) in earlier assessment years i.e. AYs 2010-11 and 2011-12 and also Tribunals decision deleted the disallowance after reproducing substantively from these years and also by holding in Para 3.3 as under: -

Before us, the learned Sr. Departmental Representative heavily relied on the assessment order. On the other hand, the learned Counsel for the assessee filed copy of Tribunal’s order in earlier years 2010-11 in vide order dated 07.08.2015 for AY 2011-12 in ITA No. 5791/Mum/2015 vide order dated 09.12.2016, wherein Tribunal following this Tribunal’s decision in the case of ACIT vs. ACIT vs. Vilas N. Tamhankar in ITA No. 4522/M/2013 (AY 2009-2010), dated 21.11.2014 deleted the addition by observing in Para 6 as under: -

We find that the Tribunal in AY 2010-11 and 2011-12 has consistently confirming the order of CIT(A) deleting this disallowance by holding that the commission paid to foreign agents is not chargeable to tax in India and therefore, there is no liability on the part of the assessee to deduct TDS under section 195 of the Act. Consequently, the commission paid to foreign agent cannot be disallowed by invoking the provisions of section 40(a)(i) of the Act. Facts remains the same in this year also, respectfully following the consistent view of the Tribunal in this year also, we confirm the order of CIT(A) deleing the disallowance. The appeal of Revenue is dismissed.

As regards to the cross objection of the assessee, the learned Counsel for the assessee fairly conceded that the CO of the assessee is only supportive of the order of CIT(A) and hence, requires no adjudication. Accordingly, the same is dismissed as infructuous.

In the result both, the appeal of Revenue and cross objection of assessee, are dismissed.