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Income Tax Appellate Tribunal, “E” BENCH, MUMBAI
Sanaa Syntex Pvt. Ltd. Jt. Commissioner of Income Tax, 135/B, Sanjay Bldg, Mittal Ward 4(3) (OSD) Industrial Estae, Morol, Andheri Aayakar Bhavana Vs. (E) Mumbai-400 059 Mumbai PAN No. AAACS6150L Appellant .. Respondent Assessee by .. Mr. Bhadsesh Doshi, AR Revenue by .. Shri Naveen Gupta, DR Date of hearing .. 04-05-2017 Date of pronouncement .. 17-05-2017 O R D E R PER MAHAVIR SINGH, JM:
This appeal by the assessee are arising out of the orders of CIT(A)-8, Mumbai, in appeal No. CIT(A)-8/Cir.4/424/2011-12 dated 11-07-2013. The Assessment was framed by DCIT-4(3) Mumbai for the A.Y. 2009-10 vide order dated 19-12-2011 u/s 143(3) of the Income Tax Act, 1961 (hereinafter ‘the Act’).
2. The only issue in this appeal of assessee is against the order of CIT(A) confirming the action of the AO in disallowing the expense in the relation of services given from non-resident agents out of India by invoking the provisions of section 40(a)(ia) of the Act for non-deduction of TDS under section 195 of the Act.
Briefly stated facts are that the assessee company is engaged in manufacturing of grey cloth fabrics and export of finished cloths. During the course of assessment proceedings, the AO noticed that the assessee has debited a sum of Rs 10,93,096/- in the profit and loss account as export commission but has not deducted any TDS. On query from the AO, the assessee replied that export commission amount to Rs 10,93,096/- was paid out of which a sum of Rs
Sanaa Syntex Pvt. Ltd. A.Y:09-10 2,88,564/- has been paid to local residents on which TDS has been deducted but balance sum of Rs 8,04,532/- has been paid to the foreign resident agents outside India directly without deduction of TDS. According to AO, the assessee should have deducted TDS under section 195 of the Act. But he failed to do so and so he disallowed the Foreign Commission of Rs. 8,04,532/- by invoking the provisions of Section 40(a)(ia) of the Act. Aggrieved, assessee preferred the appeal before CIT(A), who also confirmed the action of the AO vide Para 2.3 as under.
“2.3 I have considered the facts of the case as well as argument of the appellant. I find that the appellant could not prove that the amount of Rs.8,04,532/- was not liable for TDS under chapter XVIIB. As per the Chapter X\'IIB, any amount as payable would be liable for TDS at the time of payment or at the time of crediting the same in the books of accounts. There is no exemption made for the amounts which are directly deducted by the payees. Since the appellant has not deducted TDS on such payment, the amount of Rs.8,04,532/- was rightly disallowed by the AO. This ground of appeal is, thus, dismissed.”
Aggrieved, now assessee is in appeal before us.
Before us as well as before lower authorities assessee contended that the assessee is engaged in export of fabrics and for that purpose engaged non- resident agents and paid commission for the services rendered by foreign agents. In this year the assessee paid a sum of Rs 8,04,532/- to foreign agents who deducted commission payments directly from the export payments and net amount has been remitted by the parties. The learned Counsel for the assessee before us stated that the assessee has paid commission to non-resident due to following facts and the non-resident agents does not earn any income in India and not liable to tax in India.
“i) Non-resident operate his business activities outside India.
Sanaa Syntex Pvt. Ltd. A.Y:09-10 ii) Commission paid is in relation to services provided outside India. iii) Commission remitted to him directly outside India. iv) Agents do not have any permanent establishment or permanent business- place in India. ”
Before us, now the learned Counsel for the assessee relied on the CBDT circular No 23 dated 23-07-1969, whereby Para 4, it is clarified that a foreign agent of Indian exporter operates in his country and no part of his income i.e. in India and therefore not liable to tax in India. The following is the Para 4 of the circular: -
“4. 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 learned Counsel stated that the following was further clarified by vide Circular No. 786 dated 07-02-2000: -
“In their Audit Report for 1997-98 [D.P. No. 79(IT)] the Comptroller & Auditor General (C & AG) raised an objection that the Assessing Officer in computing the profits and gains of Business or Profession, in a case in Mumbai charge, had wrongly allowed a deduction in respect of a payment to a non-resident where tax had not been deducted at source. The nature of the payment in this case was export commission and charges payable for services rendered outside India. In the view of C & AG the expenditure should have been disallowed in accordance with the provisions of section 40(a)(i) of the IT Act, 1961. It has come to the notice of the Board that a Page 3 of 6
Sanaa Syntex Pvt. Ltd. A.Y:09-10 similar view, on the same set of facts has been taken by some Assessing Officers in other charges.
The deduction of tax at source under s. 195 would arise if the payment of commission to the nonresident agent is chargeable to tax in India. In this regard attention to CBDT Circular No. 23, dated 23rd July, 1969 is drawn, where the taxability of "Foreign Agents of Indian Exporters' was considered along with certain other specific situations. It had been clarified then that where the non-resident agent operates outside the country no part of his income arises in India. Further, 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. The relevant sections, namely section 5(2) and section 9 of the Income-tax Act, 1961 not having undergone any change in this regard, the clarification in Circular No. 23 still prevails. No tax is therefore, deductible under section 195 and consequently the expenditure on export commission and other related charges payable to a non-resident for services rendered outside India becomes allowable expenditure. On being apprised of this position the Comptroller & Auditor General have agreed to drop the objection referred to above.”
The learned Counsel for the assessee stated that the circular was withdrawn with effect from 01-04-2009 but this was very much in operation before subsequently withdrawn on 22-10-2009 and this fact was reiterated by Hon’ble Bombay High Court in its judgement in the case of CIT vs. Gujarat Reclaim & Rubber Products Ltd. in of 2013 dated 08-12- 2015 by observing as under: -
“This Circular of 1969 was admittedly in force during the two Assessment Years. It was only subsequently i.e. Page 4 of 6
Sanaa Syntex Pvt. Ltd. A.Y:09-10 on 22nd October, 2009 that the earlier Circular of 1969 and its reiteration as found in Circular No.786 of 2000 were withdrawn. However, such subsequent withdrawal of an earlier Circular cannot have retrospective operation as held by this Court in UTI v/s. P. K. Unny and Others 249 ITR 612.
Respectfully following the Hon’ble Bombay High Court in the case of Gujarat Reclaim & Rubber Products Ltd. (supra) and the board circular No. 786, we allow the claim of the assessee.
In the result, appeal of assessee is allowed. Order pronounced in the open court on 17-05-2017.