AGRA ENGINEERING CO.,MUMBAI vs. ADDL CIT RG 12(3), MUMBAI

Assessee by: Shri Narayan Atal Department by: Shri B.D.Naik सुनवाई क" तार"ख / Date of Hearing: 26.05.2016 घोषणा क" तार"ख /Date of Pronouncement: 23.09.2016 आदेश / O R D E R PER AMARJIT SINGH, JM:

The above mentioned appeals have been filed by the assessee against the different orders passed by the Commissioner of Income Tax (Appeals) 23, Mumbai [hereinafter referred to as the “CIT(A)”] relevant to the A.Y.2007-08, 2008-09 and 2009-10. Since in these 2176/Mum/2013 A.Y. 2007-08, 2008-09 & 2009-10 appeals parties are the same and the matter of controversy is also of the same which can conveniently be adjudicated together for the sake of convenience.

ITA NO.1264/MUM/2011(2007-08):-

1. The Learned Commissioner of Income Tax (Appeals) -23, Mumbai [hereafter referred to as the CIT(A)] erred in confirming the disallowance made by the Assessing Officer (AO) of the claim for deduction of overseas commission of Rs.22,20,549/- paid to the non-resident foreign sales agents u/s.40(a)(i) of the Income Tax act, 1961, on the basis of wrong appreciation of the facts and the law. Your appellant submits that on the facts and circumstances of the case and in law and in any view of the matter, tax is not deductible at source on payment of commission made to foreign (non-resident)selling agents for services rendered outside India and the AO may be directed to delete the disallowance of Rs.22,20,549/- made u/s.40(a)(i) of the Act.

3. The brief facts of the case are that the assessee filed the return of income declaring total income to the tune of Rs.1,21,80,421/- on 30.10.2007. The return was processed u/s.143(1) of the Income Tax Act, 1961 ( in short “the Act”) at the returned income. The case was selected for scrutiny. Notice u/s.143(2) of the act was issued on 05.08.2008 and served upon the assessee on 13.08.2008. Thereafter, the notice u/s.142(1) of the Act was also issued and served upon the assessee. The assessee is a firm engaged in the business of exports. ,736/Mum/2012& 2176/Mum/2013 A.Y. 2007-08, 2008-09 & 2009-10 Under the year of assessment, the assessee has paid overseas commission to the tune of Rs.22,20,549/- and did not deduct TDS on the same. Therefore, the Assessing Officer disallowed the same commission u/s.40(a)(ia) of the Act and added to the income of the assessee. But the assessee was not satisfied with the said addition, therefore, filed an appeal before CIT(A) who confirmed the said addition. Therefore, the assessee has filed the present appeal before us.

ISSUE NO.1:-

They render following services: a) The company has developed its own brand “ARROW”. It market various products as explained above, under this brand. The agent helps the company to popularize the brand and products. b) He gives us the overall demand position in that country and appraise us of the respective government policies, restrictions and requirements. c) Apart from that he gives valuable information about the competition, their products their strength and weaknesses. d) He coordinates with the existing customers for their periodical requirements, availability of ships, shipment schedules. e) He coordinates with customers and follows up for payment if and when required. ,736/Mum/2012& 2176/Mum/2013 A.Y. 2007-08, 2008-09 & 2009-10 f) He gives the information about the new developments in the markets, competition and their products. g) He gives us information about the trade fairs, exhibition etc. h) He also helps in obtaining VISA – getting VISA for some of the middle east and / or African countries is very time consuming. By arranging for invite letters from existing / prospective consumers and also through contacts in these countries govt. departments they help in expediting VISA process. These agents do not visit India and render services from abroad only. Their commission payment is done through bank, only after getting payments from the customers. They also help us in resolving disputes, if any with the buyers. In this period of recession and intense competition, most of the big corporate have their own offices and staff in addition to agents. We are a small company with limited resources. We cannot afford to have overseas offices and high profile staff to take care of such offices. Our overseas commission payment is just around one percent of the total turnover, which is fully justified.” ,736/Mum/2012& 2176/Mum/2013 A.Y. 2007-08, 2008-09 & 2009-10

“We have already submitted detailed note on the services rendered by the foreign (non-resident) commission agents vide our letter dt.21.12.2009. You will observe that the entire services are rendered by the agents outside India and the commission is paid to them by way of inheritance of foreign currency from India.

Our clients have not deducted any TDS on the commission amount since the commission paid to the foreign agents do not attract TDS u/s. 195 of the Act in view of the following:- a. The sale is effected by our client on a principal to principal basis. b. The services are rendered by the agents outside India and they do not have any PE or any branch or any business connection in India and therefore there is no income which is deemed to have accrued or arisen in India as per the provision of section 9 of the Act. c. Circular No.23 dt. 23.07.1969 dealing with meaning of business connection has dealt with the tax liability 2176/Mum/2013 A.Y. 2007-08, 2008-09 & 2009-10 of foreign agents of Indian exporters in para 3(4) of the circular issued by the CBDT, as follows: “A foreign agent of Indian exporter operates in his own county 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. This view has been reiterated by the Board in Circular No.786 dt. 07.02.2009. d. Vide circular no.7 of 2009 the Board has withdrawn w.e.f. 22.10.2009 its circular no.23 of 1969, circular no.163 of 1975 and circular no.786 of 2000 these circulars only reiterated the principles laid down by the Supreme Court in R.D.Agarwal & Co. (56 ITR 20) and Toshoku Ltd. (125 ITR 525) for understanding the concept of ‘business connection’ and attribution of profits to a business connection. However, the decision of the Supreme Court in these cases cannot be nullified merely by withdrawal of the aforesaid circulars. e. Moreover, the circulars have been withdrawn w.e.f. 22.10.2009 and therefore it at all a view has to be taken that TDS is liable to be deducted from payment I.T.A. No.1264/Mum/2011,736/Mum/2012& 2176/Mum/2013 A.Y. 2007-08, 2008-09 & 2009-10 of commission to foreign agents irrespective of the conclusion whether any income has accrued or arisen in India, it can be applicable only to any payments made or effect after 22.10.2009. Further the circulars of the Board which are beneficiary in nature are binding on the tax authorities and cannot be interpreted to have taken effect retrospectively.

In view of the above, we on our clients behalf, submit that the provisions of section 40(a)(i) of the Act are not attracted and requested you to please allow the claim for deduction of commission to foreign agents.”

Subject: Deduction of tax u/s.195 and the taxability of export commission payable to non-resident agents rendering services abroad – clarification regarding:

In the Audit Report for 1997-98 (D P No.79 (I.T). The Comptroller and 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 Income Tax Act, 1961. It has come to the notice of the Board that a 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 section 195 would arise if the payment of commission to the non-resident agent is chargeable to tax in India. In this regard attention to CBDT Circular No.23 dated 23.07.1969 is drawn, where the taxability 2176/Mum/2013 A.Y. 2007-08, 2008-09 & 2009-10 of ‘Foreign Agents of Indian Exporters” was considered alongwith certain other specific situations. It had been clarified then what 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 charge in this regard, the clarification in Circular No.23 shall 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.

This may be brought to notice of all assessing officers working in your region.”