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Income Tax Appellate Tribunal, “A” BENCH : KOLKATA
Before: Hon’ble Sri A.T.Varkey, JM & Shri M.Balaganesh, AM ]
Per M.Balaganesh, AM
This appeal of the assessee arises out of the order of the Learned Commissioner of Income Tax (Appeals) -VI, Kolkata [ in short the ld CITA] in Appeal No. 04/CIT(A)- VI/Intl.Tax/ITO,Wd-1(1)/13-14/Kol dated 19.09.2014 against the order passed by the I.T.O., International Taxation-Ward-1(1), Kolkata [ in short the ld AO] under section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as the ‘Act’) dated 25.03.2013 for the Asst Year 2011-12.
The only issue to be decided in this appeal of the revenue is as to whether the ld CITA was justified in deleting the disallowance made towards commission paid to non- resident agents would be liable for deduction of tax at source in the facts and circumstances of the case.
The brief facts of this issue is that the assessee is a company engaged in manufacturing of Ductile Iron Pipes and Fittings necessary for providing a safe water
2 ITA No.2249/Kol/2014 M/s. Electrosteel Casting Ltd. A.Yr.2011-12 supply pipeline system. The ld AO observed that the assessee deductor had remitted some amount to different non-resident agents for securing orders for assessee’s products abroad, without deducting taxes . Accordingly show cause notice u/s 201 of the Act was issued for treating the assessee as ‘assessee in default’. The assessee responded that the assessee company had incurred some expenses under the head ‘Commission’ and payments were made to different non-resident individuals and companies without deducting tax. The details are as under:- PAYMENT OF COMMISSION ; Sl. Name of the Remittance Country TDS Date of Nature of No. Recipient amount amou remittance payment (Rs.) nt 1. PRIME GROUP 1042448 UAE 0 13/04/2010 Commission ASSOCIATES 5568326 0 23/07/2010 10832518 0 22/06/2010 1276770 0 12/10/2010 4316014 0 21/09/2010 4920574 0 30/11/2010 5218172 0 18/01/2011 4910549 0 22/02/2011 1875582 0 11/03/2011 1728223 0 25/03/2011 2. MR.EDWARD 64534 Malta 0 08/10/2010 Commission ZAMMIT 319252 0 25/01/2011 3. SPECTRUM LTD 1276770 UAE 0 12/10/2010 Commission 4. ZAINAC 295870 YEMEN 0 03/11/2010 Commission ENGINEERING & ENTERPRISES 5 ELECTROSTEEL 2858097 SPAIN 0 28/02/2011 Commission EUROPE S.A 1747679 0 22/03/2011 1187751 0 02/03/2011
The assessee explained as below the reasons for non-deduction of tax at source on the aforesaid payments :- "As per section 195 of the Act, any person responsible for paying to a non-resident, not being a company, or to a foreign company, any sum chargeable under the provisions of this Act ( not being income chargeable under the head "salaries") shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other 2
3 ITA No.2249/Kol/2014 M/s. Electrosteel Casting Ltd. A.Yr.2011-12 mode, whichever is earlier, deduct Income-tax thereon at the rates in force. The withholding tax is applicable on the gross amount without any deduction.
Thus withholding tax under section 195 of the Act will only be applicable if amount payable is chargeable to tax under the Act.
Further, as per Section 5(2) of the Act, a non-resident is taxable in India on the following incomes during the previous year: · Income received/deemed to be received in India; '. Income accruing/arising or deemed to accrue/arise in India.
In the instant case, being a non-resident Company/Individual, only the following incomes would be taxable in India in its hands: · Income received/deemed to be received in India; · Income accruing/arising or deemed to accrue/arise in India.
As per Section 9(1)(i) of the Act, all incomes accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situated in India, shall be deemed to accrue or arise in India.
However even if there is a business connection in India, if no operation of business is carried out in India, then the income accruing or arising abroad through or from any business connection in India cannot be deemed to accrue or arise in India. Explanation 1 to Section 9(1)(i) provides as under:
"For the purposes of this clause-
(b) In the case of a business of which all the operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India". In the instant case, the non-residents does not have any operations, in India and all the operations with respect to the respective agreements were performed by the non-residents outside India. Moreover the commission payable is not in the nature of salaries, dividend, interest, royalty, fees for technical services. Accordingly, the commission receivable by the non-residents does not accrue or arise in India. Moreover the commission was received by the non-residents outside India and hence the non-residents are not liable to taxed in India. Further, the services rendered by the non-residents also do not qualify as fees for technical services as these services cannot be said to be in nature of technical, 3
4 ITA No.2249/Kol/2014 M/s. Electrosteel Casting Ltd. A.Yr.2011-12 managerial or consultancy services. In any case, the payment is for the source of income that Electrosteel has outside India and Section 9(l)(vii)(b) of the Act specifically exempts any payments made by a resident for earning any income from a source outside India. Accordingly, Electrosteel has not deducted taxes on the commission payments to the non-residents. To reiterate, there exists no obligation to withhold any tax for reason that services rendered by the non-residents has not triggered any tax liability in India in terms of the domestic tax law provisions."
The ld AO asked the assessee to produce the documentary evidences from which it could be concluded that the income of the non-resident recipients are business income, but no supporting documents /evidences were produced. Accordingly the ld AO concluded that the income of the non-resident recipients are their income from other source. Then he referred to the relevant Article of Double Taxation Avoidance Agreement (DTAA) for taxation of other income as under:- “DTAA with UAE: Article 22- Other income-1. Subject to the provisions of paragraph (2), Items of income of a resident of a Contracting State, wherever arising, which are not expressly dealt with in the foregoing article of this Agreement, shall be taxable only in that Contracting State. (2) The provisions of paragraph (1) shall not only apply to income, other than income from immovable property as defined in paragraph (2) of Article 6, if the recipient of such income, being a resident of a contracting state, carries on business in the other contracting statethrough a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the right or property in respect of which the income is paid is effectively connected with such permanent establishment or fixed base. In such case, the provisions of Article 7 or Article 14, as the case may be, shall apply. DTAA with Malta : Article 23-Other income-l. Items of income of a resident of a Contracting state wherever arising, not dealt with in the foregoing Articles of this Agreement shall be taxable only in that State.
The provisions of paragraph (1) shall not only apply to income, other than income from immovable property as defined in paragraph (2) of Article 6, if the recipient of such income, being a resident of a contracting state, carries on business in the other contracting state through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the right or property in respect of which the income is
5 ITA No.2249/Kol/2014 M/s. Electrosteel Casting Ltd. A.Yr.2011-12 paid is effectively connected with such permanent establishment or fixed base. In such case, the provisions of Article 7 or Article 15, as the case may be, shall apply. 3. Notwithstanding the provisions of paragraph 1 and 2, items of income of a resident of a contracting State not dealt with in the foregoing articles of this Convention and arising in the other contracting State may also be taxed in that other State. DTAA with Oman: Article 24- Other income-l. Subject to the provisions of paragraph 2 of this Article. Items of income of a resident of a Contracting State, wherever arising, which are not expressly dealt with in. the foregoing Articles of this Agreement, shall be taxable only in the Contracting State . 2. The provisions of paragraph (1) of this Article shall not apply to income, other than income from immovable property as defined in paragraph (2) of Article 6, if the recipient of such income, being a resident of a contracting state, carries on business in the other contracting state through a permanent establishment situated therein, or performs in that other Contracting State independent personal services from a fixed base situated therein, and the right of property in respect of which the income is paid is effectively connected with such permanent establishment or fixed base. In such case, the provisions of Article 7 or Article 16, as the case may be, shall apply. 3. Notwithstanding the provisions of paragraph 1 and 2, items of income of a resident of a contracting State not dealt with in the foregoing articles of this Agreement and arising in the other contracting State may also be taxed in that other State. DTAA with Spain: Article 23-Other income-l. Subject to the provisions of paragraph 2,Items of income of a resident of a Contracting State, wherever arising, which are not expressly dealt with in the foregoing Articles of this Convention, shall be taxable only in that Contracting State. 2. The provisions of paragraph (1) shall not apply to income, other than income from immovable property as defined in paragraph (2) of Article 6, if the recipient of such income, being a resident of a contracting state, carries on business in the other contracting state through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the right or property in respect of which the income is paid is effectively connected with such permanent establishment, or fixed base. In such a case, the provisions of Article 7 or Article 15, as the case may be, shall apply. 3. Notwithstanding the provisions of paragraph 1 and 2, items of income of a resident of a contracting State not dealt with in the foregoing articles of this Convention and arising in the other contracting State may be taxed in that other State. DTAA with Ukrain :Article 22- Other income-f. Subject to the provisions of paragraph 2, items of income of a resident of a Contracting State, wherever
6 ITA No.2249/Kol/2014 M/s. Electrosteel Casting Ltd. A.Yr.2011-12 arising, which are not expressly dealt within the foregoing Articles of this Convention, shall be taxable only in the Contracting State. 2. The provisions of paragraph (1) shall not apply to income, other than income from immovable property as defined in paragraph (2) of Article 6, if the recipient of such income, being a resident of a contracting state, carries on business in the other contracting state through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the right of property in respect of which the income is paid is effectively connected with such permanent establishment or fixed base. In such a case, the provisions of Article 7 or Article 15, as the case may be, shall apply. 3. Notwithstanding the provisions of paragraph 1 and 2, items of income of a resident of a Contracting State not dealt within the foregoing articles of this Convention and arising in the other Contracting State may also be taxed in that other Contracting State. From the above Articles of the DTAA's between India and other countries, it is very much clear that the income from Other Source of a non-resident of Oman, Malta, Ukrain & Spain are taxable in India and since there is no DTAA between India and Yemen, the income from other source of a non-residents of Yemen is also taxable in India.”
Based on the above, the ld AO held that the income arising to the non-residents on account of commission falls u/s 5(2)(b) of the Act as the income has accrued in India when the right to receive the income became vested. He observed that Section 5(2)(b) of the Act deals with the scope of total income from whatever source derived, which accrues or arises or is deemed to accrue or arise in India during such previous year. U/s 9(1)(i) of the Act, income arising or arising directly or indirectly, through or from any business connection in India or source of income in India shall be deemed to accrue or arise in India. He finally held as under:- “The source of income of the non-residents r who had earned commission from the business activity of the deductor. Section 5 and 9 of the Income Tax Act 1961, thus proceed on the assumption that income has a situs and the situs has to be determined according to the general principles of law. The meaning of the word situs is the place where something exists or originates, specifically the place where something (as a right) is held to be located in law. The words "accrue" or "arise" occurring in section 5 have more or less a synonymous sense and income is said to accrue or arise when the right to receive it comes into existence. In the instant case no doubt that the agents rendered their services abroad in the form of procuring 6
7 ITA No.2249/Kol/2014 M/s. Electrosteel Casting Ltd. A.Yr.2011-12 orders on behalf of the deductor, but the right to receive the commission arises in India when the orders of export are executed by the deductor in India. The fact that the agent have rendered services abroad in the form of soliciting the orders and the commission is to be remitted to them abroad are wholly irrelevant for the purpose of determining the situs of his income. In the instant case the commission income "accrue" or "arise" to those non-residents when the exports are executed in India and the bills for the same are raised. Therefore, the commission income was obviously "accrue" or "arise" in India.
Hence, the income arising on account of commission payable to the non- residents are deemed to accrue and rise in India, and is taxable under the Income tax Act 1961, in view of the specific provisions of section 5(2)(b) read with section 9(1)(i) of the Income Tax Act, 1961. The provision of section 195 would apply in this case.”
6.1. Based on these observations, he held that the tax liability of the deductor company for the Asst Year 2012-13 would be Rs 33,07,019/- including interest u/s 201(1A) of the Act.
The ld CITA granted relief to the assessee by making the following observations :- “4. I have considered the facts of the case. The I.T.O. had initially issued show cause notice in respect of commission paid to five non-residents. The appellant claimed that the commission was business income of the recipients and since they were not having any PE in India and commission was earned in relation to services rendered outside India, the income was not taxable in India and hence, no tax was required to deduct. The I.T.O. held that the appellant had not established that the income of non- resident recipients was business income and hence treated the same as 'income from other source'. Thereafter, he proceeded to analyze the provisions of relevant DTAAs and observed that income from other source of resident of Oman, Malta, Ukrain and Spain was taxable in India under the provisions of respective DT AA. Income from other source of resident of Yemen was also taxable in India since there was no DTAA with Yemen. Thereafter, the ITO held that commission had accrued in India since the right to receive commission had arisen in India where the business of the appellant was being conducted. Therefore, he held that commission paid to three persons viz. Mr. Edward Zammit, M/s Zainac Engineering & Enterprises and Electrosteel Europe was taxable in India. As per the provision of section 5(2), income of a non-resident which is received or deemed to be received in India or which accrues or arisen in India is taxable in India. According to the I.T.O., commission income of Mr. 7
8 ITA No.2249/Kol/2014 M/s. Electrosteel Casting Ltd. A.Yr.2011-12 Edward Zammit, M/s Zainac Engineering & Enterprises and Electrosteel Europe had accrued in India. On the other hand, the appellant has contended that the said income had accrued outside India.
Thus, there are two issues involved. First, as to whether commission income of the agents was in nature of business income or 'income from other sources' and second, as to whether the said income can be said to have accrued or deemed to accrue in India. In order to decide these issues, the nature of services for which commission was paid was examined. It is seen that commission to Electrosteel Europe is paid in respect of sale made by the appellant to the order procured through Electrosteel Europe, which also provides certain services like customs clearance, transportation, un-loading, bundling, storage & loading in respect of those orders. M/s Zainac Engineering & Enterprises is paid in respect of service rendered towards procurements and execution of orders. Commission to Mr. Edward Zammit is also paid in respect of order through him. Considering this position, I am not in agreement with the I.T.O., that the commission was taxable as 'income from other source'. It is very much clear from the material on record that the' commission was paid in relation to procurement of orders and servicing of clients performed by the agents on a regular basis . This obviously constitutes business activity on part of the agents. Any income derived there from is therefore to be treated as business income only. An income can be treated as 'income from other sources', only if the same does not fall under any of the specific heads of income and not otherwise.
Coming now to the second question, it is seen that all the three agents are residing outside India and the customers serviced by them are also located outside India. The entire services rendered by the agents are outside India. Even the I.T.O. has not disputed this fact. However, he is of the view that the commission had accrued/arisen in India. He has based his opinion on the fact that the export orders, for which commission was paid, were executed in India. Thus, the I.T.O. has not disputed the claim that services were rendered abroad and payments was also made abroad. He has rather placed more emphasis on the fact that even in such a case right to receive commission has accrued on account of export orders executed from India and therefore, according to him, such commission has arisen in India. Therefore, in view of section 5(2)(b) read with section 9(1 )(i) of the Income Tax Act, 1961, provision of section 195 would apply on such commission. The legal position in this regard has been carefully examined. As per clause (i) of section 9(i) following income is deemed to have accrued or arisen in India:- "All income accruing / arisen whether directly or indirectly through or from any business connection in India or through or from abroad in India or through or from any asset source of income in India or through a transfer of capital asset situated in India" 8
9 ITA No.2249/Kol/2014 M/s. Electrosteel Casting Ltd. A.Yr.2011-12 Explanation-1 to the said section provide that:-
"(a) in the case of a business of which all the operations are not carried out in India, the income of the business deemed under this clause accrued or arisen in India shall be only such part of the income as reasonably attributed to the operations carried out in India " 7. Thus, it follows from explanation 1 to section 9(1)(1 )(i) that in a business where none of the operations is carried out in India, no part of its income is deemed to accrue or arise in India. As per undisputed facts in the appellant's case, no operation was carried out by the non-resident agents in India. Therefore, it would be erroneous to hold that the entire commission income had accrued or arisen in India. In the appellant's case, entire rendering of services of agents had taken place outside India as such customers were based abroad. The commission was also paid to the account held abroad. Therefore, there is no operation which is carried out in India for which any income can be reasonably attributed. This principle has been upheld by the Apex court in the M/s. Ishikawajma-Harima Heavy Industries Ltd Vs DIT (288 ITR 408) and CIT Vs M/s. Hyundal Heavy Industries Co Ltd (291 ITR 482) On the issue of commission to foreign based agent, similar view has been taken by the Apex court in the case of CIT vs M/s.Toshoku Ltd (125 ITR 525 (SC). Similar view has been taken by Delhi High Court in the case of CIT Vs M/s. EON Technology (P) Ltd (15 Taxmann.com 391). Even the CSDT's Circular No. 163 dated 29.05.1975 and Circular No.786 dated 07.02.2000 make it clear that when no activity is carried out by non-resident commission agent in India, no income is arisen in India. This principle has been upheld in several tribunal decisions such as DCIT Circle 1 (1) Hyderabad vs M/s. Divi's Laboratories Ltd (12 Taxmann.com 103). It may also be mentioned that commission paid to agent does not fall in purview of fees for technical services etc. where explanation to section 9(2) has provided that such income of non-resident shall be deemed to accrue or arise in India under clause (v),(vi) and (vii) of sub section-(1) whether or not the non-resident has rendered services in India. Therefore, payment or commission is not governed by the said explanation and can be deemed to accrue or arise only if certain services have been rendered in India.
In view of the foregoing discussion, it is held, that the commission earned by the agents was in nature of business income. Moreover, since in the commission had been paid to the persons not having any permanent establishment in India and the services were rendered wholly outside India, no business income can be treated as accrued or deemed to accrue in India. Hence, the appellant was no liable to deduct tax u/s 195 on the same. The demand raised u/s 201(1) and interest u/s 201(1A) is accordingly deleted.”
10 ITA No.2249/Kol/2014 M/s. Electrosteel Casting Ltd. A.Yr.2011-12 8. Aggrieved, the revenue is in appeal before us on the following grounds:- “1. That on the facts and circumstances of the case, the Ld.CIT(A) erred in law in holding that the commission earned by the non resident agents were in the nature of business income and that their business income was not taxable in India in absence of "permanent Establishment" in India, without going into the facts of the case to establish that the non resident agents were actually not having any Permanent Establishment in India? 2 The Ld CIT (A) erred in relying upon the CBDT circular no. 163 dated 29/05/75 & circular no 786 date 07/02/2000, without noticing that these circulars have been superceded by CBDT circular no. 07/2009 date 22/10/2009.” 3. Any other ground to be taken at the time of hearing.
None appeared on behalf of the revenue when the case was called for hearing and no adjournment petition was even preferred by the revenue before us. Hence we proceed to dispose off the appeal after hearing the ld AR.
We have heard the ld AR. The ld CITA had observed that Commission to Electrosteel Europe was paid in respect of sale made by the assessee to the order procured through Electrosteel Europe, which also provides certain services like customs clearance, transportation, unloading, bundling, storage & loading in respect of those orders. M/s Zainac Engineering & Enterprises was paid in respect of service rendered towards procurement and execution of orders. Commission to Mr Edward Zammit was also paid in respect of order through him. Based on these facts, in our opinion, the ld AO erred in treating the commission income in the hands of non-resident recipients to be taxable in India as other income (i.e income from other sources). The services rendered by the non-resident agents constitute regular business activity on the part of the agents and hence any income derived therefrom would have to be treated only as business income. We find that the undisputed fact is that all the aforesaid three agents are residing outside India and the customers sourced by them are also located outside India. The entire services rendered by the agents are outside India. We find that the ld AO had held that the right to receive the commission has accrued in India since the
11 ITA No.2249/Kol/2014 M/s. Electrosteel Casting Ltd. A.Yr.2011-12 export orders are executed from India and therefore such commission has arose in India. In this regard, it would be relevant to analyse the provisions of section 9(1)(i) of the Act together with its Explanation thereon. From its analysis, we find that in a business where none of the operations were carried out in India, no part of its income would be deemed to accrue or arise in India.
10.1. Now the next question that arises is whether the said payment would fall within the ambit of ‘Fee for Technical Services (FTS)’ as defined in section 9(1)(vii) of the Act. We find that the nature of services rendered by the non-resident agents, does not fall under the ambit of either ‘managerial’ or ‘technical’ or ‘consultancy’ services so as to fall within the definition of FTS. Admittedly no technical services are rendered by the agents to the assessee outside India. Admittedly the non-resident agents are not managing the business of the assessee. They are simply identifying the customers for selling the assessee’s products abroad in lieu of selling commission. The said agents are not taking any business decision for and on behalf of the assessee. Hence the services rendered by them does not fall under the ambit of ‘managerial’ services. Admittedly no professional services were rendered with their skill and expertise by the non-resident agents to the assessee. The non-resident agents need not possess any specific qualification for rendering these services to the assessee. Hence the services rendered by them does not fall under the ambit of ‘consultancy’ services. Hence it could be safely concluded that the entire services rendered by the non-resident agents outside India is outside the scope of definition of FTS u/s 9(1)(vii) of the Act. Moreover, we find that the Explanation to section 9(2) of the Act would become applicable, which is effective retrospectively from 1.6.1976 onwards , only for items falling u/s 9(1)(v) ; 9(1)(vi) and 9(1)(vii) of the Act. The payment of Commission to non-resident agents does not fall in any of the three clauses of section 9(1) of the Act.
12 ITA No.2249/Kol/2014 M/s. Electrosteel Casting Ltd. A.Yr.2011-12 10.2. It is well settled that the provisions of section 195(1) of the Act are very clear that the income of the non-resident should be chargeable to tax in India so as to warrant deduction of tax at source by the deductor. In the instant case, the commission is not chargeable to tax in India by any means. Hence by placing reliance on the decision of the Hon’ble Apex Court in the case of GE India Technology Centre P Ltd vs CIT reported in (2010) 327 ITR 456 (SC), we hold that the commission paid by the assessee to the non-resident agents is not chargeable to tax in India and hence there is no question of deduction of tax at source on the said payment.
10.2.1. We find that the Hon’ble Supreme Court in the case of CIT vs Toshuku Ltd reported in 125 ITR 525 (SC) held that:- As regards the question as to whether the commission amounts could be treated as income accrued in India to non-resident assessee, clause (a ) of the Explanation to section 9(1)(i) provides that in the case of a business of which all the operations are not carried out in India, the income of the business deemed under that clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India. In the instant case, the non-resident assessees did not carry on any business operations in the taxable territories. They acted as selling agents outside India. The receipt in India of the sale proceeds of tobacco remitted or caused to be remitted by the purchasers from abroad did not amount to an operation carried out by the assessee in India as contemplated by clause (a ) of the Explanation to section 9(1)(i). The commission amounts which were earned by the non-resident assessees for services rendered outside India could not, therefore, be deemed to be incomes which had either accrued or arisen in India.
10.2.2. We find that the co-ordinate bench of Chennai Tribunal in the case of ITO vs Trident Exports reported in 149 ITD 361 for the Asst Year 2010-11 vide order dated 27.2.2014 had held as under:- 8. We have heard both the parties and carefully perused the materials available on record. From the facts of the case, it is evident that the assessee had made payments to commission agents located in foreign countries. These foreign agents have rendered services in their respective countries and had received the commission. It is also evident that the foreign agents did not have any PE in India and there was nothing brought on record to show that the agreements between the assessee & the commission agents were 12
13 ITA No.2249/Kol/2014 M/s. Electrosteel Casting Ltd. A.Yr.2011-12 entered in India. In these circumstance the decision rendered in the case of Toshoku Ltd. (supra) is squarely applicable considering the facts of the case before us. In this case, the Hon'ble Apex Court held that the commission agents, who are engaged in the services executed outside India, cannot be considered to carry on any business operations in India and therefore, provisions of section 9(1)(i) of the Act and Explanation-1A will not be applicable. Similarly, the Hon'ble Apex Court, in the case of GE India Technology Cen. (P.) Ltd (supra) has held that the expression "chargeable under the provisions of the Act in Sec.195(1)" shows that the remittance has to be of trading receipt, the whole or part of which, is liable to tax in India. If tax is not so assessable, there is no question of tax at source being deducted. Considering the facts and circumstances of the case and the decisions rendered by the Hon'ble Apex Court, we are of the considered view that the Ld. Ld. CIT (A) had decided the issue in accordance with law. Therefore, we hereby confirmed the order of the Ld.CIT (A).
10.3. Now let us go to the superceding circular issued by the CBDT vide Circular No. 7/2009 dated 22.10.2009. In this regard we hold that it is well settled that the Hon’ble Supreme Court in the case of Kerala Financial Corporation vs CIT reported in 210 ITR 129 (SC) had held that Circulars issued by the CBDT u/s 119 of the Act cannot override or detract the provisions of the Act. Thus withdrawal of the earlier Circulars (i.e Circular No. 163 dt 29.5.75 & Circular No. 786 dt 7.2.2000) does not affect the settled position that export commission is not taxable in India given the fact that no relevant changes have been made in section 5, 9 & 195 of the Act. We find that the co-ordinate bench of Hyderabad Tribunal in the case of DCIT vs Divi’s Laboratories Ltd reported in (2011) 131 ITD 271 (Hyd Trib) dated 25.3.2011 had held as under:- 8. We have considered the submissions of both the parties and perused the relevant material available on record. The moot question that arises out of these appeals is whether the payment of commission made to the overseas agents without deduction of tax is attracted disallowance under section 40(a)( ia) of the Act or not. Whether the payment in dispute made by way of cheque or demand draft by posting the same in India would amount to payment in India and consequently whether mere payment would be said to arise or accrue in India or not? First we will take up the issue whether the payment of commission to overseas agents with out deduction of tax is attracted disallowance under section 40(a)( ia) of the Act or not. We find that the CBDT by its recent Circular No. 7 dated 22-10-2009 withdrawn its earlier Circular Nos.23 dated 23-7-2009, 163 dated 29-5-1975 and 786 dated 7-2-2000. The earlier circulars issued by the CBDT have clearly demonstrated the illustrations to explain that such commission payments can be paid without deduction of tax. Thus, the main thrust in such a situation is whether the commission made to overseas agents, who are non- 13
14 ITA No.2249/Kol/2014 M/s. Electrosteel Casting Ltd. A.Yr.2011-12 resident entities, and who render services only at such particular place, is assessable to tax. Section 195 of the Act very clearly speaks that unless the income is liable to be taxed in India, there is no obligation to deduct tax. Now, in order to determine whether the Income could be deemed to be accrued or arisen in India, section 9 of the Act is the basis. This section, in our opinion, does not provide scope for taxing such payment because the basic criteria provided in the section is about genesis or accruing or arising in India, by virtue of connection with the property in India, control and management vested in India, which are not satisfied in the present cases. Under these circumstances, withdrawal of earlier circulars issued by the CBDT has no assistance to the department, in any way, in disallowing such expenditure. It appears that an overseas agent of Indian exporter operates in his own country and no part of his income arises in India and his commission is usually remitted directly to him by way of TT or posting of cheques/demand drafts in India and therefore the same is not received by him or on his behalf in India and such an overseas agent is not liable to income-tax in India on these commission payments. This view is fortified by the judgment of Apex Court in the case of Toshoku Ltd. (supra).
It is pertinent to note that the section 195 of the Act has to be read along with the charging sections 4, 5 and 9 of the Act. One should not read section 195 to mean that the moment there is a remittance; the obligation to deduct TDS automatically arises. If we were to accept such contention, it would mean that on mere payment in India, income would be said to arise or accrue in India. These are the observations made in the judgment of Apex Court in the case of GE India Technology Centre (P.) Ltd. (supra), relied on by the learned counsel for the assessee, for the proposition that provisions relating to deduction of tax applies only to those sums which are chargeable to tax under the Income-tax Act. If the contentions of the department, are to be taken as correct, that any person making payment to a non-resident is necessarily required to deduct tax, then the consequence would be that the department would be entitled to appropriate the monies deposited by the payer even if the sum paid is not chargeable to tax because there is no provision in the Income-tax Act by which a payer can obtain refund. As per section 237 read with section 199 of the Act implies that only the recipient of the sum i.e., payee would seek a refund. In view of the above, hence, no tax is deductible under section 195 of the Act on commission payments and consequently the expenditure on export commission payable to non-resident for services rendered outside India becomes allowable expenditure and the same is outside rigors of the section 40(a)( ia) of the Act.
The judgment of the Karnataka High Court in the case of CIT v. Samsung Electronics Co. Ltd. [2009] 185 Taxman 313 /[2010] 320 ITR 209 , relied on by the department, dealt on whether tax is to be deducted at source, under section 195 of the Act, in respect of payment made to non-resident, on import of software. The judgment of the Karnataka High Court is largely based on the judgment of Supreme Court in the case of Transmission Corpn. of AP Ltd. v. CIT [1999] 239 ITR 587 / 105 Taxman 742 . However, the Karnataka High Court not followed the subsequent binding judgment of 14
15 ITA No.2249/Kol/2014 M/s. Electrosteel Casting Ltd. A.Yr.2011-12 the Supreme Court in the case of Vijay Ship Breaking Corpn. v. CIT [2008] 175 Taxman 77/[2009] 314 ITR 309 wherein the Apex Court has categorically held that, the resident is not required to deduct TDS under section 195(1) of the Act, if the income of non- resident recipient is not taxable in India. Given this binding precedent, the judgment of Karnataka High Court in the case of Samsung Electronics Co. Ltd. (supra) would not apply to the cases where the non-resident recipient is not taxable in India. We also find that the judgment of Apex Court in the case of Ishikawajma-Harima Heavy Industries Ltd. v. DIT [2007] 288 ITR 408 / 158 Taxman 259wherein it was held that for section 195 is to be attracted, the services rendered by the non-resident should have been rendered in India and also should have been used in India and that, this twin tests has to be satisfied for section 195 is to be attracted. We find that the Legislation introduced the Explanation to section 9(2) of the Act, after this judgment, with retrospective effect from 1-6-1976 in the Finance Act, 2007. Despite this introduction of Explanation to section 9(2) of the Act, the Karnataka High Court in the case ofJindal Thermal Power Co. Ltd. v. Dy. CIT ( TDS) [2010] 321 ITR 31/[2009] 182 Taxman 252 held that the law laid down by the Apex Court in the case of Ishikawajma-Harima Heavy Industries Ltd. (supra) still holds good despite the retrospective amendment to section 9 of the Act. In our opinion, the requirement of services of the non-resident being rendered in India and being utilized in India is still valid, despite the judgment of the Karnataka High Court in the case of Samsung Electronics Co. Ltd. (supra) and withdrawal of earlier circulars issued on this subject by CBDT.
10.4. To summarise, we hold :-
a) The assessee had paid commission to non-resident agents situated outside India for securing orders for selling the assessee’s products abroad. Hence it is purely a simple marketing service. b) Apart from that , the non-resident agents also provide certain services like customs clearance, transportation, unloading, bundling, storage & loading in respect of these orders. c) Admittedly the non-resident agents rendered services outside India. d) The commission paid to non-resident agents would only be taxable as business income in the hands of the non-residents. Admittedly the non-resident agents do not have any Permanent Establishment in India. Hence the income derived by the non- resident agents does not become chargeable to tax in India u/s 195(1) of the Act so as to warrant deduction of tax at source. 15
16 ITA No.2249/Kol/2014 M/s. Electrosteel Casting Ltd. A.Yr.2011-12 e) The services rendered by the non-resident agents to the assessee are not utilized in India. 10.5. In view of our aforesaid findings in the facts and circumstances of the case and respectfully following the various judicial precedents relied upon hereinabove, we hold that the assessee payer is not liable for deduction of tax at source for the commission payments made to non-resident agents outside India for services rendered outside India. Accordingly, we hold that the assessee cannot be treated as ‘assessee in default’ in the instant case and consequently cannot be fastened with the liability u/s 201 and 201(1A) of the Act. Hence we do not find any infirmity in the order of the ld CITA . Accordingly, the grounds raised by the revenue are dismissed. 11. In the result, the appeal of the revenue is dismissed.
Order pronounced in the Court on 07.07.2017
Sd/- Sd/- [A.T.Varkey] [ M.Balaganesh ] Judicial Member Accountant Member
Dated : 07.07.2017 [RG PS]
Copy of the order forwarded to:
1.Electrosteel Casting Limited, 19, Camac Street, Kolkata-700017. 2. I.T.O. (International Taxation), Kolkata. . 3..C.I.T.(A)-VI, Kolkata 4. C.I.T.-II, Kolkata. 5. CIT(DR), Kolkata Benches, Kolkata.