ASST CIT 17(2), MUMBAI vs. KHIMJI VISARAM & SONS, MUMBAI

O R D E R PER D. T. GARASIA, JM:

The captioned appeal by the Revenue is directed against the order of the CIT(A)-23, Mumbai dated 11/11/2014, pertaining to the Assessment Year 2008-09, which in turn has arisen from the order passed by the Assessing Officer dated 24/11/2010 under section 143(3) of the Income Tax Act, 1961 (in short ‘the Act’).

2 M/s Khimji Visram & Sons

1. On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in deleting the additions made by the Assessing Officer u/s 40a(ia) r.w.s. 195 for non deduction of tax from the payment made to the non-resident.

2. On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in holding that the payment made to the non- resident are on account of commission paid to non-resident without appreciating the fact that the service rendered by the non- resident persons are in the nature of managerial services as held by the Assessing Officer relying on the decision Hon’ble Supreme Court in the case of the R. Dalmia vs. CIT.

3. The short facts of the case are as under:- The assessee has filed the return of income on 24/11/2010. The assessee has paid Commission of Rs.87,15,979/- was paid to non-residents without deduction of tax at source. The Commission was paid to foreign brokers for introducing foreign clients for export of raw cotton. The assessee has contended that the Commission paid to foreign brokers for export of goods cannot be disallowed for non-deduction tax at source. The Assessing Officer was of the view that the Commission paid to agent for his activity in popularizing the brand of the assessee, contacting more clients on behalf of the assessee giving the information in respect of prospective customers to the assessee and all the parameters make the activity done by the Commission agent to be clearly under the definition of technical fees as stipulated by Section 9 of the Act and considering the judgments. The Assessing Officer was of the opinion that the Commission agent are offering above services which are managerial in nature on which the assessee is liable to deduct tax at source. Therefore, he has disallowed the same.

3 M/s Khimji Visram & Sons Matter carried to CIT(A) and CIT(A) has allowed the claim by observing as under:- “2.32 1 have also perused the order of the Hon'ble ITAT 'A' Bench, Mumbai in assessee's own case for the A.Y. 2007-08 on identical issues wherein the Assessing Officer had disallowed the commission amount of Rs.85,80,661/- paid to foreign agents without deduction of tax at source for the reason that the impugned commission was paid to the foreign agents in connection with the services rendered for popularizing the brand of the assessee, contacting more clients on behalf of the assessee and for giving the information in respect of prospective customers to the assessee. The Assessing Officer took the view that the above said services rendered by the foreign commission agents would clearly fall under the category of managerial services included in the definition of "fee for technical services" as defined in section 9(1)(vii) of the Act. Accordingly, the A.O. held that commission received by the foreign agents is chargeable to tax in India u/s 9(1)(vii) of the Act. Accordingly by placing reliance on the decision rendered by the Hon'ble Karnataka High Court in the case of CIT vs. Samsung Electronics (320 ITR 209), the A.O. held that the above said commission payment is liable to be disallowed under section 40(a)(i) of the Act for non deduction of tax at source. Accordingly, the A.O. disallowed the commission expenditure of Rs.85,80,661/-. The Ld. CIT(A) confirmed the disallowance. On appeal, by the assessee, the Hon'ble Tribunal, in its order dated 08.10.2014 held as follows:-

"We have heard the rival contentions and perused the record. We find that both the taxing authorities have taken a view that services rendered by foreign commission agent would clearly fall in the category of "Fee for technical services" defined u/s 9(1)(vii) of the Act. In this regard, the Ld. AR submitted that the question whether the payment of commission made for securing orders would fall in the category of "Fee for Technical Services" was examined by the Hon'ble Madras High Court in the case of CIT vs. Faizan Shoes Pvt. Ltd. in TC (A) 789 of 2103 and the Hon'ble High Court, vide its order dated 22.7.2014 has held "the services rendered by the non-resident agent can at best be called as a service for completion of the export commitment and would not fall within the definition of "fees for technical services". Accordingly, the Hon'ble Madras High Court held that 4 M/s Khimji Visram & Sons "Section 9 of the Act is not applicable to the case and consequent j, Section 195 of the Act does not come into play". The Ld. AR also placed reliance on the decision rendered by Delhi Bench of the Tribunal in the case of Dy.CIT v. Angeliquie International Ltd. (2013) 55 SOT 226 (Delhi) (Trib.), wherein the Tribunal had considered the expression "managerial", technical and consultancy services used in section 9(1)(vii) of the Act. The Delhi Tribunal held that procurement services will not fall in any of the above said three categories. The Ld. AR submitted that the impugned commission payments were made for securing sales orders only and the tax authorities have presumed that the foreign agents were rendering some other kind of services also. He submitted that they have drawn this kind of inference on surmises and conjectures only. We find force in the said contentions of the Ld. A.R. We notice that the assessing officer of Ld.CIT(A) has not brought any material on record to substantiate their views that some other kind of services were also rendered by the foreign agents. Hence, we have to agree with the submission of the assessee that the commission amounts were paid for procuring sales orders. Hence, by following the decision rendered by the Hon'ble Madras High Court (referred supra) and also the decision rendered by the Delhi Bench of Tribunal (supra), we hold that the payment made for technical services will not fall in the category of "Fee for Technical Services" as defined u/s 9(1)(vii) of the Act." 2.33 The Hon'ble Tribunal has, therefore, held that the assessee is not liable to deduct tax at source from the commission payments made to the foreign agents in the facts and circumstances of the case. It, therefore, allowed the appeal of the assessee. The issue in the present appeal is identical to the issue decided by the Hon'ble Tribunal for the assessment year 2007-08. The decisions of the higher appellate authorities are required to be followed by the CIT(A) when the issue in appeal is identical. In Bank of Baroda vs. H.C. Shrivastava 122 Taxman 330 (Born), the Hon'ble High Court of Bombay has observed as follows in Para 16 of their judgment: -

"At this juncture, we cannot resist from observing that the judgment delivered by the Tribunal was very much binding on the Assessing Officer. The Assessing Officer was bound to follow the judgments in its true letter and 5 M/s Khimji Visram & Sons spirit. It was necessary for vis-à-vis the Tribunal, was bound by the judgment of the Tribunal and the judicial unity and discipline that all the authorities below the Tribunal must accept as binding the judgment of the Tribunal. The Assessing Officer being inferior officer Assessing Officer should not have tried to distinguish the same on untenable grounds. In this behalf, it will not be out of place to mention that 'in the hierarchical system of Courts' which exists in our country, it is necessary for each lower tier' including the High Court, 'to accept loyally the decisions of the higher tiers.' 'It. is inevitable in hierarchical system of Courts that there are decisions of the Supreme Appellate Tribunals which do not attract the unanimous approval of all members of the judiciary. But the judicial system only works if someone is allowed to have the last word, and that last word once spoken is loyally accepted'. The better wisdom of the Court below must yield to the higher wisdom of the Court above as held by the Supreme Court in the matter of CCE v. Dunlop India Ltd. AIR 1985 SC 330." 2.34 In the appellate order dated 11.06.2013 for the assessment year 2009-10 in assessee's own case on identical issue, the Ld.CIT(A) has held that the provisions of section 40(a)(i) of the Act does not apply to the facts of the case. 2.35 In view of the aforesaid reasons and respectfully following the decision of the Hon'ble Tribunal in assessee's own case on identical issue for the A.Yr. 2007-08 in which it has been held that the payment of sales commission will, not fall in the category of "Fee for Technical Services" as defined under section 9(1)(vii) of the Act, I hold that the payment made by the assessee who is the resident to the non-resident overseas agents for the purpose of procuring orders is not in the nature of fees for technical services, the income of the non-resident overseas agents do not fall within the purview of section 9(1)(vii) of the I.T.Act,1961. No evidence has been brought on record also to show that the payments made were in the nature of payments for managerial services which fell within the meaning of "technical services". Hence, any income earned by them cannot be deemed to accrue or arise in India. Consequently, no tax was required to be deducted at source by the assessee in respect of the amounts payable/ paid to the non-resident overseas agents in view of the provisions of section 195 of the 6 M/s Khimji Visram & Sons I.T. Act, 1961 since such sums were not chargeable under the provisions of the I.T. Act, 1961. Similar payments made to non- resident overseas agents in the case of Armayesh Global. (supra) have been held by the Hon'ble Mumbai Tribunal to be simply commission payments made by the assessee and not payments for managerial services. Since the services were rendered outside India and the overseas agents do not have PE in India, payments were made outside India and the services were also utilized outside India, the provisions of sec.5 cannot be applied to the commission paid so as to make it taxable in India. Since the sum, i.e., the commission paid is not chargeable to tax in India; the assessee did not have any liability to deduct tax at source u/s 195 of the I.T. Act, 1961 on the sum paid to the non-resident overseas agents. Since no tax was deductible at source under Chapter XVII B of the I. T. Act, 1961, the provisions of sec. 40(a)(i) would not be applicable in respect of the amounts in question payable outside India. Therefore, no disallowance in respect of the above amounts can be made under the said section. The disallowance is, therefore, directed to be deleted. The ground of appeal filed by the assessee is allowed.”