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Income Tax Appellate Tribunal, ‘C’ BENCH : BANGALORE
Before: SHRI ABRAHAM P GEORGE & SHRI VIJAY PAL RAO
& IT(IT)A Nos.22 to 25/Bang/2014 M/s.CEE AAR Exports Page 2 of 16 No.918/Bang/2014 is against the order dated 19/05/2015 of the CIT(A) (Large tax payers unit), Bangalore.
First, group of appeals are taken up. Facts giving rise to all these appeals are that assessee engaged in manufacture and export of silk fabrics to various European countries apart from USA, China, Australia and New Zealand, had paid commission at the rate of 10% of export value on orders procured through one M/s.Associated Marketing Agency based in Ontario, Canada. Where the value of order exceeds USD 50,000 the rate of commission was 12.5% of the FOB value. The commission paid/payable by the assessee as per its accounts for various years were as under:
Sl.No. Financial year Commission paid/payable 1 2006-07 Rs.27,14,192/- 2 2007-08 Rs.22,98,688/- 3 2008-09 Rs.28,01,428/- 4 2009-10 Rs.16,63,132/- Assessing Officer (AO) required assessee to explain why deduction of tax as specified u/s 195 was not effected before paying the amounts to the commission agent. Assessee, in its reply, stated that income/commission agency was not liable to be taxed in India. Further, according to the assessee, it was not required for it to deduct tax at source by virtue of CBDT circular No.786 dated 7/2/2000 and CBDT circular No.23 dated 23/07/1969. & IT(IT)A Nos.22 to 25/Bang/2014 M/s.CEE AAR Exports Page 3 of 16 3. AO was not impressed by the reply given by assessee. According to him, CBDT circular No.23 dated 23/7/1969 was withdrawn and circular No.786 dated 7/2/2000 had become infructuous due to substitution/alteration in section 9 of Income Tax Act, which came subsequent to the date of the latter circular. AO was of the opinion that non-resident agent was in the business of procuring export orders for assessee on a regular basis. According to him, sec.195 brought within its ambit any sum chargeable under the provisions of the Act. As per AO, agent was acting on behalf of assessee who was resident in India and consideration received by the agent was relatable to the turnover and such turnover of the Indian entity emanated from India. According to him, income accruing to non-resident agent was from a business connection in India. Such business connection, according to AO, included any business activity which was carried out through a person acting on behalf of non- resident. AO noted that Explanation to section 9 only expanded the scope of section 9 and did not restrict it in any manner. As per the AO, assessee had failed to deduct tax at source on payments effected to said marketing agency. He held that assessee was one in default under section 201(1) of the Act and liable for interest under section 201(1A) of the Act. The liability of assessee under section 201(1) and 201(1A) for the impugned assessment years were fixed as under: & IT(IT)A Nos.22 to 25/Bang/2014 M/s.CEE AAR Exports Page 4 of 16
Aggrieved, assessee moved in appeal before the CIT(A) for all the impugned assessment years. It reiterated the contentions taken by it before AO. CIT(A), however, was not impressed by the contentions of assessee. According to him, a similar situation was considered by the Authority for Advance Ruling (AAR) in the case of Rajiv Malhotra, In re (284 ITR 564). According to him, it was held in the said decision by AAR that income accruing or arising directly/indirectly through or from any business connection in India or source of income in India could be considered as accruing or arising to the non-resident in India. As per CIT(A), AAR had considered the case of two non-resident agents similar to the one in assessee’s own case where also commission was received by the non-resident agent from the business activity of the assessee in India. As per CIT(A), agents abroad had rendered services in the form of soliciting orders in the said case also. Whether commission was remitted to them from India or not was irrelevant for the purpose of determining the accrual of income. CIT(A) thus held that assessee was liable to deduct tax at source on payments effected to its marketing agents abroad. He upheld the order of the AO.
ITA No.918 & IT(IT)A Nos.22 to 25/Bang/2014 M/s.CEE AAR Exports Page 5 of 16 5. Now before us, ld.AR strongly assailing orders of CIT(A) submitted that the co-ordinate bench of this Tribunal in the case of Zanav Home Collection vs. Jt.CIT in had considered a very similar issue. As per AR, question was whether it was required to deduct tax at source on agency commission paid by the assessee abroad. AR pointed out that when agreements with non-residents proved that services were to be rendered by such non-resident outside India and where such services were rendered as agent of the Indian exporter operating from India, there was no territorial nexus with India, as far as such non-resident agents were concerned. Further, as per AR, decision of the AAR relied on by CIT(A) was not binding on this Tribunal since it was assessee-specific. In any case, as per AR, there was no business connection for the non-residents in India and the business of the non-resident agent was exclusively in countries other than India. Therefore, according to him, their earning of income could not be attributed to any business done by them in India.
Per contra, DR strongly supporting the orders of the authorities below, submitted that the reasonings given by AAR in another case of SKF Boilers & Driers Pvt.Ltd., In re (345 ITR 385) also supported the orders of the lower authorities. According to him, income arising on account of commission payable to agents who are working abroad for an assessee in India had to be deemed as income accruing or arising to such agent in India. & IT(IT)A Nos.22 to 25/Bang/2014 M/s.CEE AAR Exports Page 6 of 16 Assessee had failed to deduct tax at source as required u/s 195 of the Act. As per DR, lower authorities were justified in treating the assessee one in default under section 201(1) and levying interest under section 201(1A) of the Act on it.
7. We have perused the orders of the authorities below and heard the rival submissions. There is no dispute that commission was paid by assessee to non-resident agent who was doing their business outside India. Assessee had paid commission at a percentage of the FOB value of the orders canvassed by such agents. No doubt, CIT(A) had followed the reasonings of the AAR in the case of Rajiv Malhotra, In re (supra) and SKF Boilers & Driers Pvt.Ltd., In re (supra). AAR had held that for the purpose of determining the situs of income, the area where agents had rendered services was irrelevant and what was relevant was the basis on which their right to receive arose. Such right as per AAR arose when the orders were executed by assessee in India. What we find is that a situation akin to the one in this case had come before this Tribunal as well in the case of Zanav Home Collection (supra) decided on 13/2/2015 where one of us was a party. The question there, was disallowance of payments made to a non- resident agent applying the provisions of sec.40(a)(i) of the Act. Assessee concerned had relied on the CBDT circular No.13 dated 23/7/1969 and also circular No.786 dated 7/2/2000. This Tribunal, after considering the relevant section had held as under at paragraphs 23 to 41 of the order dated 13/2/2015: & IT(IT)A Nos.22 to 25/Bang/2014 M/s.CEE AAR Exports Page 7 of 16 “Disallowance of payments to non-residents (Rs.25,46,796) 23. The next issue that arises for consideration is with regard to the disallowance of Rs.25,46,796 which was claimed as a deduction by the assessee under the head ‘agency commission’ u/s. 40(a)(i). The facts with regard to the aforesaid issue are as follows. In the relevant previous year, the assessee made payments of export commission to its various non- resident agents as follows:-
The AO called upon the assessee to show cause as to why the assessee had not deducted at source u/s. 195 of the Act on the payments made to the non-resident. In reply, the assessee contended that payment by the assessee to the non-resident was in the nature of commission for services rendered outside India. The assessee submitted that the agents were paid commission for procuring business to the assessee and that there was no territorial nexus for bringing the commission received by the non-resident to tax in India. The assessee further submitted that if the income of the non-resident is not chargeable to tax in India, then there was no obligation on the part of assessee to deduct tax at source and in this regard relied on the CBDT Circular No.13 dated 23.7.1969. The aforesaid Circular has since been withdrawn, but nevertheless, the assessee placed reliance on the aforesaid Circular, which lays down the correct position in law.
The AO, however, held that non-resident has source of income and business connection in India and therefore commission income is chargeable to tax in India and that the assessee ought to have deducted tax at source at the time of making payment to the non-resident. Since the assessee failed to do so, the AO disallowed the claim of assessee for deduction of a sum of Rs.25,46,796 invoking the provisions of section 40(a)(i) of the Act. & IT(IT)A Nos.22 to 25/Bang/2014 M/s.CEE AAR Exports Page 8 of 16 26. On appeal by the assessee, the CIT(Appeals) confirmed the order of the AO. According to the CIT(Appeals), section 9(1)(i) of the Act was applicable and all income accruing or arising, whether directly or indirectly through or from any business connection in India or sources of income in India, shall be deemed to be accrue or arise in India. According to him, the business of the assessee firm is based in India and the parties to whom payment has been made are claimed to be ‘commission agents’ of the assessee firm. The assessee firm had been making payments to these parties for several years whereby the parties get a regular income from Indian shores resulting in a business connection. As the assessee firm derives income from conducting and running its business in India and since these payments were on account of commission to agents, these parties definitely had business conection in India. According to the CIT(A), since there was a ‘business connection, obligation on the part of the assessee to deduct tax at source u/s. 195(1) on commission payment definitely arose. As per Explanation 2 of section 195, obligation to comply with section 195(1) and to make a deduction is applicable and to be extended on all persons, resident or non resident even if the non resident has no residence or place of business or business connection in India, or any other presence in any manner whatsoever in India. 27. The CIT(A) noted that in the instant case, these non- residents definitely had business connection in India. According to him, even if it was assumed for a moment, that these payments are not through business connection and that these parties do not have a residence or place of business in India or ‘Permanent Establishment’ (as claimed in the grounds of appeal
) in India, still, in view of Explanation 2 of Section 195, the assessee had an obligation to deduct tax at source from the said payments.
28. The CIT(Appeals) accordingly confirmed the order of the AO.
29. Aggrieved by the order of CIT(Appeals), the assessee has filed the present appeal before the Tribunal.
30. The ld. Counsel for the assessee submitted that the facts regarding the transactions are as follows:- (1) Agreements with all the agents have been entered into on similar lines. These & IT(IT)A Nos.22 to 25/Bang/2014 M/s.CEE AAR Exports Page 9 of 16 agreements are in Annexure H of the Paper Book. (2) Briefly, the terms of the agreement are that the agents are granted the right to sell the merchandise specified in the agreement and produced by the principal (the assessee) within the territorial jurisdiction defined by the agreements. (3) In all these cases, the territorial jurisdiction of these agency rights is restricted to one country or, in some cases, three countries. (4) No agent is granted rights in India. (5) In consideration for these sales, commission (usually of 5% or 6%) on the FOB prices of the orders actually booked is paid by the assessee to the agents. (6) The agreements have been entered into on various dates and are for preliminary terms of three years each but automatically renew from year- to- year. (7) The sums attracting disallowance represent the commission paid under these agreements.
31. It was submitted that in the light of the above facts, three questions arise for consideration before the Tribunal as follows:- (1) Is the commission paid to the agents by the assessee chargeable to tax in India either in full or in part at the hands of the agents in the light of the provisions of section 9 and the relevant Double Taxation Avoidance Agreements (DTAAs)? (2) If the income is so chargeable, is tax deductible at source there from under section 195? & IT(IT)A Nos.22 to 25/Bang/2014 M/s.CEE AAR Exports Page 10 of 16 (3) Did the assessee act against the law by not approaching the Income Tax Department in terms of section 195(2)?
32. It was further submitted that as regards chargeability under section 9 of the Act, it is an undisputed fact that all the agents are non-residents. At the hands of non- residents, the charge of income tax under the Act is attracted only in the following cases:- (i) The income is received in India; (ii) the income is deemed to be received in India; (iii) the income accrues in India; or (iv) the income is deemed to accrue in India in terms of section 9.
It is not the contention of the Revenue that the income is received, deemed to be received or even that it accrues in India. The Revenue only contends that the income is deemed to accrue in India in terms of section 9 as the agents have set up a source of income in India by entering into the agency agreements with the assessee.
A reading of section 9(1)(i) reveals that it does not cover agency commission of the nature under consideration here and that, only if it arises from any business connection in India or from a source in India, such commission would attract the charge of income tax. 35. In concluding that the source of the commission is in India, the learned CIT (A) has presumed that the source of this commission income is the principal (the assessee). The ratio applied by the learned CIT(A) is that the commission income arises only because of the principal granting the agency rights to the agent and finally making the sales. The learned CIT(A) has concluded, therefore, that the source is the sale contract arising from the principal and that the source is, therefore, within India. It was submitted that this conclusion is erroneous and deserves to be struck down. The commission is consideration for the services rendered by the agent in identifying customers and obtaining orders for the principal. The source of this commission income, therefore, lies in the markets in which these services are being rendered. Considering that these services are & IT(IT)A Nos.22 to 25/Bang/2014 M/s.CEE AAR Exports Page 11 of 16 rendered in markets outside India, the source of this commission income is clearly outside India. 36. The ld. Counsel for the assessee also made submissions with regard to the fact that, assuming the income is treated as having accrued to the non-resident in India, in view of DTAA between India and countries of which the non-resident or tax residence, income can be taxed only if there is a permanent establishment in India and since there is no permanent establishment in India, the amount in question cannot be brought to tax in the hands of the non-resident and consequently there would be no liability on the part of assessee to deduct tax at source. 37. The ld. DR relied on the order of the CIT(Appeals). 38. We have considered the rival submissions. The copies of the Agreement between the Assessee and the non-resident (7 out of the 10 non-residents listed in the earlier part of this order) has been filed before us as Annexure-H in the paper book filed by the Assessee. The main clauses in the agreement needs to be seen to appreciate the contentions of the parties before us.(Agreement between Assessee and M/S.Duo Textiles) Clause-1, 3 and 4 of the Agreement reads as follows: “1. APPOINTMENT: Principal grants Agent the right to sell the merchandise (stipulated in Article 2) in the territory (stipulated in Article 3) and Agent accepts such appointment. 3. TERRITORY: The Territory covered under this agreement is confined to South Africa. 4. COMMISSION: Principal shall allow the Agent 5% commission for all Merchandise (based on FOB prices) Commission are not payable later than 2 (two) months after merchandise have been shipped in respect of all orders ITA No.918 & IT(IT)A Nos.22 to 25/Bang/2014 M/s.CEE AAR Exports Page 12 of 16 which have been accepted and executed by Principal. However, that no such commissions shall be payable until Principal receives the full amount of payment due to him.”
The terms of the Agreement in the case of all the agents are identical. It is clear from the agreements that the non-residents rendered services outside India and the nature of services rendered by them is as agent of and Indian exporter operating in his own country. There is absolutely no territorial nexus with India as far as the non- residents are concerned. The non-resident’s source of income outside India and accrues and arises outside India. The Hon’ble Supreme Court in the case of Carborandum Co. v. CIT (1977) 108 ITR 335, has held that “the carrying on of activities or operations in India is essential to make the non-resident have business connection in India in order that he may be liable to tax in respect of the income attributable to that business connection. The CBDT in Circular No. 17(XXXVII) of 1953 dated 17th July, 1953 has stated as follows:- “Foreign agents of Indian exporters – A foreign agent of an Indian exporter operates in his own country and no part of his income arises in India. Usually, his commission is remitted directly to him; and is, therefore, not received by or on his behalf in India. Such an agent is not liable to Indian Income-tax.” The CBDT circular No.786 dated 07/02/2000 regarding taxability of export commission payable to non-resident agents rendering services abroad has stated that “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.” The conclusions of the AO and CIT(A) that the non-resident had a business connection in India in our view is without any basis and cannot be sustained.
On applicability of Expln-2 to Sec.195(1) of the Act which was introduced by the finance Act, 2012 w.e.f. 1.4.1962, we are of the view that the said explanation is applicable only when there is accrual of income in India. When the conclusion reached is that there is no accrual of & IT(IT)A Nos.22 to 25/Bang/2014 M/s.CEE AAR Exports Page 13 of 16 income in India, we fail to see how Expln.2 to Sec.195(1) of the Act are attracted.
In view of the above conclusions, we are of the view that there was no obligation on the part of the Assessee to deduct tax at source while making payment to the non- resident. Consequently, no disallowance of commission expenses paid to non-resident could be made invoking the provisions of sec.40(a)(i) of the Act. We hold accordingly and direct the AO to delete the disallowance so made.”
No doubt, co-ordinate bench had carefully seen the agreements entered by the assessee concerned with the non- resident party while coming to the above conclusion. Copies of the agreements entered by the assessee before us, has also been placed on record. Relevant part of one such agreement is reproduced hereunder:
“AGENCY AGREEMENT In this agreement between M/s. CEE AAR EXPORTS, 1st located at No.215/1, 4th CROSS, FLOOR, CUBBONPET, BANGALORE-560002 And M/S. ASSOCIATED MARKETING AGENCY LINKS, located at 2155, LEANNE BLVD, SUITE #241, MISSISSAUGA, ONTARIO, 15K 2K8, CANADA Hereinafter referred to as 'AGENT' The following is agreed upon:
1. 1. The Principal hereby appoint the Agent as their sole representative for Canada and non exclusive for the U.S.A 2. The agreement shall be valid for the period of three years from 1st June 2008 until the appointment shall be terminated by 3 months notice in writing by either party concerned.
3. The Principal shall provide the Agent with all necessary samples free domicile together with full details relating to Prices, Deliveries, & IT(IT)A Nos.22 to 25/Bang/2014 M/s.CEE AAR Exports Page 14 of 16 composition etc., (Copies of Price lists to be included with samples at all time).
4. The Agent will forwards to the Principal all enquiries he may receive and shall not enter into any contractors on behalf of the Principal, not bind or attempt to bind them in any way, nor shall the Agent receive any money on behalf of the Principal unless upon special instructions given.
5. The Principal shall forward to the Agent confirmations of all orders, invoice a documents in respect to any sale to customers in Canada. The Principal will fax copies of Invoices and Airway Bill at the time of dispatch.
6a. The Agent shall get Commission at the rate of 10 percent of F.O.B. value for an order value upto USD 50,000(USD FIFTY THOUSAND ONLY) 6b. For any single order exceeding USd) 50,000 (USD FIFTY THOUSAND) agent shall get Commission at the rate of 12.50% of F.0 B value and Principal shall bear hotel expense of the Agent in India, if any up to a maximum of 1% of the order value.
Commission shall be paid to the Agent by the Principal by means of a Draft or Bank Cheque in 20 working days after Principal receives payment for each shipment.
8. In the untimely event of financial difficulties by the Principal, Commission due is considered as secured and preferential before other creditors.
Any disputes or claims arising out of or in relation to this 'AGREEMENT' shall be settled mutually. ” & IT(IT)A Nos.22 to 25/Bang/2014 M/s.CEE AAR Exports Page 15 of 16 9. It is very clear that the role of the agent was canvassing orders for the assessee abroad. The crux of the agreement was similar to the agreement considered by this Tribunal in the case of Zanav Home Collections (supra). As pointed out by the AR, the decisions of the AAR does have a persuasive value but being assessee-specific, we would prefer to go by the decision given by aco-ordinate bench, especially so when it covers the issue squarely.
In the result, we are of the opinion that the assessee was not obliged to deduct tax at source on the payments effected to its agents abroad. Assessee could not have been treated as assessee in default nor could it be levied interest under section 201(1A) of the Act.
Apart from assailing the orders under section 201(1) and 201(1A), assessee has in its appeal No. ITA 918/Bang/2014 also assailed the assessment done on it for assessment year 2008-09 where a disallowance under section 40(a)(i) was also made for very same reason. Since we have held that assessee was not liable to deduct tax at source on the payments effected to non- residents, there is no question of any disallowance under section 40(a)(i) of the Act.