ITO 28(2)(3), NAVI MUMBAI vs. NATRAJ MOHAN KANCHAN, NAVI MUMBAI

The captioned appeal by revenue for Assessment Year [AY] 2011- 12 contest the order of the Ld. Commissioner of Income-Tax (Appeals)- 26 [CIT(A)], Mumbai, Appeal No.CIT(A)33/IT/616/13-14 dated 25/11/2014 qua certain relief provided to the assessee against Natraj Mohan Kanchan Assessment Year 2011-12 disallowance u/s 40(a)(i) of the Income Tax Act, 1961. The assessment for impugned AY was framed by Ld. Income Tax Officer 28(2)(3), Mumbai u/s 143(3) on 31/12/2013. 2.1 Facts leading to the same are that the assessee being resident individual engaged as garment traders and exporter of engineering items under proprietary concern namely SNK Trading & Exports was assessed for impugned AY u/s 143(3) on 31/12/2013 at Rs.1,25,40,290/- after disallowance of Rs.1,15,07,972/- on account of foreign commission as against returned income of Rs.11,49,510/- filed by the assessee on 13/09/2011. The solitary issued involved in the appeal is disallowance of certain foreign commission payment u/s 40(a)(i) for want of deduction of tax at source. 2.2 During assessment proceedings, it was noted that the assessee made impugned commission payment of Rs.1,15,07,972/- to a foreign consignee namely Ghana Engineering Co. Ltd. against certain export sales made to Standard Tools & Hardware but did not deduct any tax at source against the same as per the provisions of Section 195. The assessee contended that the commission income of foreign entity accrued outside India and since that entity did not have any permanent establishment [PE] in India, the impugned payment was not liable for deduction of tax at source. However, not convinced, Ld. AO, placing reliance on certain judicial pronouncements and Explanation-2 to Section 195, concluded that the assessee was required to deduct Tax at source against the same and failure to do the same attract disallowance u/s 40(a)(ia). Natraj Mohan Kanchan Assessment Year 2011-12 2.3 Aggrieved, the assessee contested the same successfully before Ld.CIT(A) vide impugned order dated 25/11/2014 where the assessee reiterated the said contentions and placed reliance on several judicial pronouncements. The Ld. CIT(A), after appreciating the same, concurred with the stand of the assessee and decided the issue in assessee’s favor in the following manner:- 3.3. I have considered the assessment order and submission made for the appellant, It is the case of the AO that as per section 195, the assessee was required to deduct tax at source on commission paid to foreign agent, M/s. Ghana Engineering Co. Ltd. Failure on the part of the assessee, has according to the AO attracted disallowance u/s 40(a)(ia). 3.4 The assessee on the other hand argues that the commission paid to the agent for services rendered aboard was not "chargeable to tax in India' and therefore he was not required to deduct tax at source u/s 195 on such commission payments. 3.5 Examination of the facts of the transaction including the documentation available on record reveal that the assessee has purchased in India and exported to Ghana, West Africa manganese steel cast articles to one M/s. Standard Tools & Hardware Trading F.Z.E, through the non-resident agent M/s. Ghana Engineering Co. Ltd. The commission agent is based at Accra, Ghana and does not have any permanent establishment or business connection in India. 3.6 The material sold by the assessee is stated to be utilized in manufacture of automobile and other engineering products in Ghana and other West African nations. Subsequently, the commission agent deducts his commission from the invoice value and remits the net amount to assessee in India. Thus, the commission to the non-resident agent is deducted at source and the net amount is received by the assessee. It is, thus, the case of the appellant that the services provided by the non-resident agent are aboard and the payment to the non-resident agent is also made aboard. That the non-resident commission agent does not render any service or perform any activity in India, these being the undisputed facts. 3.7 On the background of the above facts, it cannot be said that the income of the non- resident agent can be stated to accrue or arise in India, particularly after considering the provisions of section 9(1) of the 1. T. Act 1961. In the instant case, the non-resident commission agent did not carry any business operation in India but merely acted as selling agents outside India. The non-resident agent has also not provided say services which can be termed as technical in nature. The agent has only acted as commission agent for procuring sales orders aboard. 3.8 The scope and ambit of section 195 has been explanation by the Hon. Supreme Court in GE India Technology Centre (P) Ltd. - Vs - CIT & Anr,327 ITR 456 (SC) (210). In the said case, the term “any other sum chargeable under the provision of Act" in section 195 is explained. The Hon. Supreme Court held that, if payment is made in respect of the amount which is not chargeable to tax under the provisions of Act, TDS is not liable to be deducted. 3.9 the Hon. Delhi High Court in the case of CIT –vs- EON Technology (P) Ltd.343 ITR 366 (Delhi) (2012) following the decision in the case of GE India Technology Centre (P) Ltd. (SC) held that payment of sate commission to a non-resident agent operating outside India would not attract liability to deduct tax at source u/s 195 and disallowance u/a 40(a)(i) was not called for.

We have carefully heard the rival contentions and perused relevant material on record. First of all, it is noted that failure to deduct TDS on foreign payment attracts disallowance u/s 40(a)(i) whereas the lower authorities, have, at most of the places, referred to the same as 40(a)(ia). However, assuming the same to be typographical error, we proceed further to decide the issue on merits.

The admitted facts are that the foreign entity does not have any permanent establishment in India. Secondly, the commission payment relates to services performed outside India on account of export sales made by the assessee. It is well settled legal position that the payment in question, first of all, should be chargeable to tax in India before the Natraj Mohan Kanchan Assessment Year 2011-12 provisions of tax deduction at source [TDS] could be applied to the same. In other words, the provisions of Section 195 could be applied to the assessee provided the impugned payments, at the first instance, were chargeable to tax in India. If the same are not chargeable to tax in India, the same do not attract TDS provisions. This view of ours is fortified by the judgment of Hon’ble Apex Court rendered in the case of GE India Technology Centre (P) Ltd. vs. CIT [327 ITR 456] where the Hon’ble court has held that if the income is not chargeable to tax in India, there is no liability of TDS u/s 195 of the Income Tax Act. Therefore, in order to determine the applicability of the provisions of Section 195, it is first essential to find out whether the sum paid to non-resident is chargeable to tax as per the statutory provisions or not. If the impugned payments are not chargeable to tax, the provisions of Section 195 are not attracted to the same.

We find that the assessee has paid commission on export sales to foreign entity which does not have any permanent establishment in India and the services are rendered outside India. The said payment could not be terms as Managerial / Professional / Technical services within the meaning of Section 9(i)(vii). This view is fortified by the judgment of Hon’ble Delhi High Court rendered in CIT vs. EON Technology (P) Ltd. [343 ITR 366] where the Hon’ble court after considering the relevant CBDT circulars observed as under:- "Circular No. 23, dated July 23, 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. Natraj Mohan Kanchan Assessment Year 2011-12 Circular No. 786, dated February 7, 2000 As clarified earlier in Circular No. 23,dated July 23, 1969, (see under section 5) where the non-resident agent operates outside the country, no part of his income arises in India, and since the payment is usually remitted directly abroad, it cannot be held to have been received by or on behalf of the agent in India. Such payments were, therefore, held to be not taxable in India. This clarification still prevails. In view of the fact that the relevant sections (section 5(2) and section 9) have not undergone and change in this regard. No tax is, therefore, deductible under section 195 from export commission and other related charges payable to such a non-resident for services rendered outside India."

The above position has also been accepted by the revenue vide CBDT circular No. 02/2014 dated 26/02/2014 which is extracted below:-

References were received from field officers on the issue of deduction of tax at source under section 195 of the Income-Tax Act, 1961 in the tight of the decisions of the Supreme Court of India in the case of GE India Technology (P.) Ltd. v. CIT [2010] 327 ITR 156 (SC) and Transmission Corporation of AP Ltd. and another v. CIT [1999] 239 ITR 587 (SC) and the decision of the Madras High Court in CIT v. Chennai Metropolitan Water tax Cases Appeals Nos.500-501 of 2005, with a request for clarification as to whether the tax is to be deducted under sub-section (1) of section 195 on the whole sum being remitted to a non-resident or only the portion representing the sum chargeable to tax, particularly if no application has been made undo sub-section (2) of section 195 of the Act to determine the sum.

The matter has been examined in the Board and accordingly, in exercise of powers vested under Section 119 of the Act, the Board hereby directs that in a case where the assessee fails to deduct tax under section 195 of the Act, the Assessing Officer shall determine the appropriate proportion of the sum chargeable to tax as mentioned in sub-section (1) of section 195 to ascertain the tax liability on which the deductor shall be deemed to be an assessee in default under section 201 of the Act, and the appropriate proportion of the sum will depend on the facts and circumstances of each case taking into account nature of remittances, income component therein or any other fact relevant to determine such appropriate proportion. Natraj Mohan Kanchan Assessment Year 2011-12 4. The undersigned is directed to state that the above position may be brought to the notice of all officers concerned.

The above discussion / observations lead us to inevitable conclusion that the commission paid by the assessee, in the first instance, was not chargeable to tax in the hands of the payee and therefore, did not require any TDS u/s 195. Therefore, we are inclined to confirm the stand of Ld. CIT(A) and dismiss the revenue’s appeal.

Resultantly, the revenue’s appeal stands dismissed.