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Income Tax Appellate Tribunal, “A” BENCH, MUMBAI
Before: SHRI R.C.SHARMA, AM & SHRI AMARJIT SINGH, JM
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):-
The assessee has raised the following grounds:-
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:-
Under this issue the assessee has raised the sole point with regard to the wrong confirmation of addition of overseas commission to the tune of Rs.22,20,549/- in view of the section contains in section 40(a)(i) of the Act. We have heard the arguments advanced by the learned representative of the parties and perused the record. The learned representative of the assessee has argued that the assessee has made payment to the tune of Rs.22,20,549/- and did not deduct the TDS on the same because the TDS was not required to deductable as the said income paid to the various persons is not liable to be assessed in India. Therefore, in the said circumstances the CIT(A) has wrongly confirmed the addition which is liable to be deleted in view of the law settled in Gujarat Reclaim & Rubber Product Ltd. 60 SOT 22 (ITAT, Mumbai), CIT Vs. Gujarat Reclaim & Rubber Product Ltd. IT Appeal No.2116 of 2013 with IT Appeal No.169 of 2014 (Bombay High 2176/Mum/2013 A.Y. 2007-08, 2008-09 & 2009-10 Court) and Armayesh Global Vs. ACIT, 12(3), Mumbai – 51 SOT 564 (ITAT-Mumbai) and CIT Vs. EON Technologies Pvt. Ltd. 343 ITR 366 (Delhi High Court). It is also argued that the learned CIT(A) has wrongly arrived at this conclusion that the Commission paid to the various persons is in managerial in nature, therefore the TDS is required to be deducted in accordance with law but the said finding is not justifiable as each and every transaction have brought into the notice of the Assessing Officer, therefore in the said circumstances the addition is not liable to be sustainable in the eyes of law. On the other hand the learned representative of the department has strongly relied upon the order passed by the CIT(A) in question.
Before going further it is necessary to advert the nature of the services provided by the non-resident on record which has been explained by the assessee in his letter dated 21.12.2009. “Services rendered by commission agent: Business of the company The company is in 100% export business and a recognized export house, majority of its exports are to Africa, Middle East, South East etc. It exports the products like four wheeler engines, fuel pumps, and its spare parts for automobiles, trucks and tractors under the brand name “ARROW” ,736/Mum/2012& 2176/Mum/2013 A.Y. 2007-08, 2008-09 & 2009-10 It does not have any overseas office, neither any overseas staff. In export market there is always a cut throat competition from local as well as international traders and OEM suppliers. So these Commission Agents are imperative to work as representatives of the company and held in marketing the brand and products.
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
Thereafter, the Assessing Officer issued the notice for not deducting the TDS. The assessee has also made submission which has been mentioned below:
“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.”
Thereafter, the Assessing Officer arrived at this conclusion that the services offered by the said persons are covered under the managerial services and included as fees for technical services. The assessee did not obtain any services u/s.194(2) of the Act, therefore, the payment made to the various persons to the tune of Rs.22,20,549/- was disallowed u/s.40(a)(i) of the Act. No doubt CIT(A) has confirmed the same. Now it is required to be seen whether CIT(A) has rightly confirmed the order or not. The assessee has relied upon the above mentioned law and also circular no.786 dated 07.02.2009 issued by CBDT wherein it is specifically mentioned that in such kind of payments provision u/s.40(a)(i) of the Act is not liable to be attracted. The important point to arrive at this point is that whether 2176/Mum/2013 A.Y. 2007-08, 2008-09 & 2009-10 the income is chargeable to tax in India or not. There is nothing on record to which it can be assumed that the said commission is liable to be taxed in India. On this issue the law has already been settled in case of Gujarat Reclaim & Rubber Products Ltd. Vs. Additional Commissioner of Income Tax 10(2), ITAT, Mumbai bench in which it is specifically held that where the assessee has paid commission to non-resident agent outside India for services provided in foreign countries and in absence of PE of non-resident agent in India said payment would not be chargeable to tax in India, therefore, no disallowance under section 40(a)(i) of the Act can be made. The revenue has filed the appeal against the said order which has been dismissed by the Jurisdictional Bombay High Court in ITA No.2116 of 2013 with ITA No.169 of 2014 in case of CIT Vs. Gujarat Reclaim & Rubber Products Ltd. dated 08.12.20015. In case of section 40(a)(ia) of the Act the co-ordinate bench of Hydrabad in case of DCIT Vs. Divi’s Laboratories Ltd. 131 ITD 271 has also held that payment of commission made to overseas agent without deduction of TDS does not attract disallowance u/s.40(a)(ia) of the Act and also place reliance upon the CBDT Circular No.7 dated 22.10.2009.
In the instant case the services have been rendered outside India which is not liable to be taxable in India. Moreover, it is pertinent to subscribe the contents of the circular no.786 dated 07.02.2009 issued by CBDT which may clarify more in connection with the services I.T.A. No.1264/Mum/2011,736/Mum/2012& 2176/Mum/2013 A.Y. 2007-08, 2008-09 & 2009-10 rendered outside the India which is not liable to taxed in India, is hereby reproduced below:-
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.”
It is not in dispute that the assessee paid the commission for the services rendered outside India which is not taxable in India. Therefore, the assessee is not under obligation to deduct the TDS u/s.40(a)(ia) of the Act. Accordingly, by relaying upon the law mentioned above we set aside the order of the CIT(A) and direct the 2176/Mum/2013 A.Y. 2007-08, 2008-09 & 2009-10 Assessing Officer to delete the said addition, therefore this issue is decided in favour of the assessee against the revenue.