ACIT, CIRCLE-2(1)(1),AGRA, AGRA vs. EMCO EXPORTS, AGRA

4. The revenue is in appeal against the impugned order passed by learned CIT(A) on the following grounds :

“1. That the CITIA) has erred on facts and in law in deleting the addition of Rs. 2,53,06,886/- by relying upon the provisions of Section 9 of the Income Tax Act, 1961, which are applicable to non-residents, who in the present case is the foreign agent and not to the assessee. The CIT(A) failed to appreciate that the assessee, being the payer/deductor in the present case, is 3 | P a g e governed by the provisions of Section 195 of the Act, and not by Section 9. The deletion of the addition of Rs. 2,53,06,886/- therefore, is based on a misapplication of law and is liable to be set aside.

2. That the CIT(A) has erred on facts and in law in deleting the addition of Rs. 2,53,06,886/- without appreciating that Section 195 of the Income Tax Act, 1961, which governs the obligation to deduct tax at source on payments made to non-residents, does not stipulate the existence of a permanent establishment or business connection of the non-resident in India, nor does it make any reference to the provisions of Section 9 of the Act.

3. That the CIT(A) has erred on facts and in law in deleting the addition of Rs.2,53,06,886/ by accepting the contention of the assessee that the commission paid to the foreign agent was not chargeable to tax under the provisions of the Income Tax Act, 1961, without appreciating that, as per Section 195(2) of the Act, the determination of chargeability of such 'other sum' is not within the domain of the payer/deductor. The law requires the payer to file an application electronically in Form 15E under Rule 29BA before the Assessing Officer for such determination. In the present case, no such application was made by the assessee, and thus, the deletion of the addition without compliance with the procedure laid down under Section 195(2) is unsustainable in law.

4. That the CIT(A) has erred on facts and in law in disregarding the applicability of the judgment of the Hon'ble Supreme Court in the case of Transmission Corporation of Andhra Pradesh Ltd. us. CIT, as relied upon by the Assessing Officer. The CIT(A) held the said judgment to be inapplicable on the ground that in this case, the work was executed by non-residents in India, whereas in the present case, the non-resident did not execute any work or carry out any activity in India. However, the CIT(A) failed to appreciate that in the case of Transmission Corporation of Andhra Pradesh Ltd. vs. CIT, such agreements were also made with the non-residents in which no work was executed in India by the non-residents. Therefore, the principles laid down by the Hon'ble Supreme Court are squarely applicable to the present case, and the deletion of the addition on a misreading of the legal precedent is unsustainable in law. ………………..”

5. Perused the records. Heard learned Sr. DR for the appellant revenue and learned representative for the respondent assessee.

6. The main point for determination under appeal is as to whether learned CIT(A) has erred in deleting the addition of Rs. 2,53,06,886/-, paid to the foreign commission Agent, ignoring the fact that the assessee was governed by the provisions of section 195 of the Act and not by section 9 of the Act, further ignoring that no application in Form 15E under Rule 29BA of the Income-tax Rules, 1962 was filed before the Assessing Officer, which is contrary to the decision of Hon’ble Supreme Court in Transmission Corporation of A.P. Ltd. vs. Commissioner of Income-tax (1999) 239 ITR 587 (SC) ?

7. Learned DR for the revenue has submitted that the assessee has admittedly remitted the payment of said commission of Rs.2,53,06,886/- to foreign commission agent, but failed to deduct tax at source under the provisions of section 195 of the Act. Learned DR, therefore, submits that the Assessing Officer was right in disallowing the said payment and prayed to set aside the impugned order passed by the learned CIT(A), which is contrary to the Apex Court decision in Transmission Corporation of A.P. Ltd. (supra).

8. Learned AR has submitted that the issue is directly covered by various judgments of ITAT, High Court and Supreme Court and referred the following decisions :

(i). GE India Technology Centre (P) Ltd. vs. CIT (2010) 327 ITR 456 (SC).

(ii). DCIT, Circle 1(1), Hyderabad vs. M/s. Divi’s Laboratories Ltd., Hyderabad (ITA No.601 to 604/Hyd/2009 – A.Y. 2001- 02 to 2004-05) order dated 25.03.2011

(iii). ACIT, Circle 1, Agra vs. M/s. Nuova Shoes, Agra (ITA No. 435/Agr/2015- A.Y. 2010-11) order dated 28.09.2017.

(iv). ACIT, Circle-1, Agra vs. M/s. Manufax (India) (ITA No. 434 & 446/Agr/2015 – A.Y. 2010-11 and 2011-12) order dated 11.04.2018.

(v). ACIT, Central Circle, Agra vs. M/s. Virola International (ITA No. 112/Agr/2017 – A.Y. 2012-13) order dated 25.01.2018.

9. The issue in hand is no more res integra. Hon’ble Supreme Court in GE India Technology Centre (P) Ltd. (supra), vide para 3 to 11 has held as under :

3. Appellant(s) are the distributors of imported pre-packaged shrink wrapped standardized software from Microsoft and other Suppliers outside India. During the relevant assessment year(s) appellant(s) made payments to the said software Suppliers which according to the appellant(s) represented the purchase price of the abovementioned software. The ITO(TDS) held that since the sale of software included a license to use the same, payments made by the appellant(s) to the foreign Suppliers constituted royalty, which was deemed to accrue or arise in India. Therefore, TAS was liable to be deducted under Section 195 of the I.T. Act. The said finding of the ITO(TDS) was upheld by the Commissioner (A). In second appeal, the ITAT, however, held that the amount paid by appellant(s) to the foreign software Suppliers was not “royalty and the same did not give rise to any income taxable in India, and therefore, the appellant(s) was not liable to deduct TAS.

195(2) and has obtained a permission for non-deduction of the TAS, it was not permissible for the payer to contend that the payment made to the non-resident did not give rise to “income” taxable in India and that, therefore, there was no need to deduct any TAS. This argument of the Department was accepted by the High Court vide the impugned judgment. For reaching this conclusion, the High Court placed strong reliance on the judgment of this Court in Transmission Corporation of A.P. Ltd. Vs. C.I.T. [239 ITR 587(SC)]. Aggrieved by the said decision, the appellant(s) has come to this Court by way of civil appeal(s). Analysis of Section 195

salaries) chargeable under the I.T. Act in the case of non-residents only and not in the case of residents. Failure to deduct the tax under this Section may disentitle the payer to any allowance apart from prosecution under Section 276B. Thus, Section 195 imposes a statutory obligation on any person responsible for paying to a non-resident, any interest (not being interest on securities) or any other sum (not being dividend) chargeable under the provisions of the I.T. Act, to deduct income tax at the rates in force unless he is liable to pay income tax thereon as an agent. Payment to non-residents by way of royalty and payment for technical services rendered in India are common examples of sums chargeable under the provisions of the I.T. Act to which the aforestated requirement of tax deduction at source applies. The tax so collected and deducted is required to be paid to the credit of Central Government in terms of Section 200 of the I.T. Act read with Rule 30 of the I.T. Rules 1962. Failure to deduct tax or failure to pay tax would also render a person liable to penalty under Section 201 read with Section 221 of the I.T. Act. In addition, he would also be liable under Section 201(1A) to pay simple interest at 12 per cent per annum on the amount of such tax from the date on which such tax was deductible to the date on which such tax is actually paid. The most important expression in Section 195(1) consists of the words “chargeable under the provisions of the Act”. A person paying interest or any other sum to a non-resident is not liable to deduct tax if such sum is not chargeable to tax under the I.T. Act. For instance, where there is no obligation on the part of the payer and no right to receive the sum by the recipient and that the payment does not arise out of any contract or obligation between the payer and the recipient but is made voluntarily, such payments cannot be regarded as income under the I.T. Act. It may be noted that Section 195 contemplates not merely amounts, the whole of which are pure income payments, it also covers composite payments which has an element of income embedded or incorporated in them. Thus, where an amount is payable to a non-resident, the payer is under an obligation to deduct TAS in respect of such composite payments. The obligation to deduct TAS is, however, limited to the appropriate proportion of income chargeable under the Act forming part of the gross sum of money payable to the non-resident. This obligation being limited to the appropriate proportion of income flows from the words used in Section 195(1), namely, “chargeable under the provisions of the Act”. It is for this reason that vide Circular No. 728 dated October 30, 1995 the CBDT has clarified that the tax deductor can take into consideration the effect of DTAA in respect of payment of royalties and technical fees while deducting TAS. It may also be noted that Section 195(1) is in identical terms with Section 18(3B) of the 1922 Act. In CIT Vs. Cooper Engineering [68 ITR 457] it was pointed out that if the payment made by the resident to the non-resident was an amount which was not chargeable to tax in India, then no tax is deductible at source even though the assessee had not made an application under Section 18(3B) (now Section 195(2) of the I.T. Act). The application of Section 195(2) 8 | P a g e pre-supposes that the person responsible for making the payment to the non-resident is in no doubt that tax is payable in respect of some part of the amount to be remitted to a non-resident but is not sure as to what should be the portion so taxable or is not sure as to the amount of tax to be deducted. In such a situation, he is required to make an application to the ITO(TDS) for determining the amount. It is only when these conditions are satisfied and an application is made to the ITO(TDS) that the question of making an order under Section 195(2) will arise. In fact, at one point of time, there was a provision in the I.T. Act to obtain a NOC from the Department that no tax was due. That certificate was required to be given to RBI for making remittance. It was held in the case of Czechoslovak Ocean Shipping International Joint Stock Company Vs. ITO [81 ITR 162(Calcutta)] that an application for NOC cannot be said to be an application under Section 195(2) of the Act. While deciding the scope of Section 195(2) it is important to note that the tax which is required to be deducted at source is deductible only out of the chargeable sum. This is the underlying principle of Section 195. Hence, apart from Section 9(1), Sections 4, 5, 9, 90, 91 as well as the provisions of DTAA are also relevant, while applying tax deduction at source provisions. Reference to ITO(TDS) under Section 195(2) or 195(3) either by the non-resident or by the resident payer is to avoid any future hassles for both resident as well as non-resident. In our view, Sections 195(2) and 195(3) are safeguards. The said provisions are of practical importance. This reasoning of ours is based on the decision of this Court in Transmission Corporation(supra) in which this Court has observed that the provision of Section 195(2) is a safeguard. From this it follows that where a person responsible for deduction is fairly certain then he can make his own determination as to whether the tax was deductible at source and, if so, what should be the amount thereof Submissions and findings thereon

9. One more aspect needs to be highlighted. Section 195 falls in Chapter XVII which deals with collection and recovery. Chapter XVII-B deals with deduction at source by the payer. On analysis of various provisions of Chapter XVII one finds use of different expressions, however, the expression “sum chargeable under the provisions of the 9 | P a g e

Act” is used only in Section 195. For example, Section 194C casts an obligation to deduct TAS in respect of “any sum paid to any resident”. Similarly, Sections 194EE and 194F inter alia provide for deduction of tax in respect of “any amount” referred to in the specified provisions. In none of the provisions we find the expression “sum chargeable under the provisions of the Act”, which as stated above, is an expression used only in Section 195(1). Therefore, this Court is required to give meaning and effect to the said expression. It follows, therefore, that the obligation to deduct TAS arises only when there is a sum chargeable under the Act. Section 195(2) is not merely a provision to provide information to the ITO(TDS). It is a provision requiring tax to be deducted at source to be paid to the Revenue by the payer who makes payment to a non-resident. Therefore, Section 195 has to be read inconformity with the charging provisions, i.e., Sections 4, 5 and 9. This reasoning flows from the words “sum chargeable under the provisions of the Act” in Section 195(1). The fact that the Revenue has not obtained any information per se cannot be a ground to construe Section 195 widely so as to require deduction of TAS even in a case where an amount paid is not chargeable to tax in India at all. We cannot read Section 195, as suggested by the Department, namely, that the moment there is remittance the obligation to deduct TAS arises. If we were to accept such a contention it would mean that on mere payment income would be said to arise or accrue in India. Therefore, as stated earlier, if the contention of the Department was accepted it would mean obliteration of the expression “sum chargeable under the provisions of the Act” from Section 195(1). While interpreting a Section one has to give weightage to every word used in that section. While interpreting the provisions of the Income Tax Act one cannot read the charging Sections of that Act de hors the machinery Sections. The Act is to be read as an integrated Code. Section 195 appears in Chapter XVII which deals with collection and recovery. As held in the case of C.I.T. Vs. Eli Lilly & Co. (India) (P.) Ltd. [312 ITR 225] the provisions for deduction of TAS which is in Chapter XVII dealing with collection of taxes and the charging provisions of the I.T. Act form one single integral, inseparable Code and, therefore, the provisions relating to TDS applies only to those sums which are “chargeable to tax” under the I.T. Act. It is true that the judgment in Eli Lilly (supra) was confined to Section 192 of the I.T. Act. However, there is some similarity between the two. If one looks at Section 192 one finds that it imposes statutory obligation on the payer to deduct TAS when he pays any income “chargeable under the head salaries”. Similarly, Section 195 imposes a statutory obligation on any person responsible for paying to a non-resident any sum “chargeable under the provisions of the Act”, which expression, as stated above, do not find place in other Sections of Chapter XVII. It is in this sense that we hold that the I.T. Act constitutes one single integral inseparable Code. Hence, the provisions relating to TDS applies only to those sums which are chargeable to tax under the I.T. Act. If the contention of the Department that any person making payment to a 10 | P a g e non-resident is necessarily required to deduct TAS then the consequence would be that the Department would be entitled to appropriate the moneys deposited by the payer even if the sum paid is not chargeable to tax because there is no provision in the I.T. Act by which a payer can obtain refund. Section 237 read with Section 199 implies that only the recipient of the sum, i.e., the payee could seek a refund. It must therefore follow, if the Department is right, that the law requires tax to be deducted on all payments. The payer, therefore, has to deduct and pay tax, even if the so-called deduction comes out of his own pocket and he has no remedy whatsoever, even where the sum paid by him is not a sum chargeable under the Act. The interpretation of the Department, therefore, not only requires the words “chargeable under the provisions of the Act” to be omitted, it also leads to an absurd consequence. The interpretation placed by the Department would result in a situation where even when the income has no territorial nexus with India or is not chargeable in India, the Government would nonetheless collect tax. In our view, Section 195(2) provides a remedy by which a person may seek a determination of the “appropriate proportion of such sum so chargeable” where a proportion of the sum so chargeable is liable to tax. The entire basis of the Department’s contention is based on administrative convenience in support of its interpretation. According to the Department huge seepage of revenue can take place if persons making payments to non-residents are free to deduct TAS or not to deduct TAS. It is the case of the Department that Section 195(2), as interpreted by the High Court, would plug the loophole as the said interpretation requires the payer to make a declaration before the ITO(TDS) of payments made to non-residents. In other words, according to the Department Section 195(2) is a provision by which payer is required to inform the Department of the remittances he makes to the non-residents by which the Department is able to keep track of the remittances being made to non-residents outside India. We find no merit in these contentions. As stated hereinabove, Section 195(1) uses the expression “sum chargeable under the provisions of the Act.” We need to give weightage to those words. Further, Section 195 uses the word ‘payer’ and not the word “assessee”. The payer is not an assessee. The payer becomes an assessee-in-default only when he fails to fulfill the statutory obligation under Section 195(1). If the payment does not contain the element of income the payer cannot be made liable. He cannot be declared to be an assessee-in-default. The abovementioned contention of the Department is based on an apprehension which is ill founded. The payer is also an assessee under the ordinary provisions of the I.T. Act. When the payer remits an amount to a non-resident out of India he claims deduction or allowances under the Income Tax Act for the said sum as an “expenditure”. Under Section 40(a)(i), inserted vide Finance Act, 1988 w.e.f. 1.4.89, payment in respect of royalty, fees for technical services or other sums chargeable under the Income Tax Act would not get the benefit of deduction if the assessee fails to deduct TAS in respect of 11 | P a g e payments outside India which are chargeable under the I.T. Act. This provision ensures effective compliance of Section 195 of the I.T. Act relating to tax deduction at source in respect of payments outside India in respect of royalties, fees or other sums chargeable under the I.T. Act. In a given case where the payer is an assessee he will definitely claim deduction under the I.T. Act for such remittance and on inquiry if the AO finds that the sums remitted outside India comes within the definition of royalty or fees for technical service or other sums chargeable under the I.T. Act then it would be open to the AO to disallow such claim for deduction. Similarly, vide Finance Act, 2008, w.e.f. 1.4.2008 sub- Section (6) has been inserted in Section 195 which requires the payer to furnish information relating to payment of any sum in such form and manner as may be prescribed by the Board. This provision is brought into force only from 1.4.2008. It will not apply for the period with which we are concerned in these cases before us. Therefore, in our view, there are adequate safeguards in the Act which would prevent revenue leakage.

Applicability of the judgment in the case of Transmission Corporation (supra) 10. In Transmission Corporation case (supra) a non-resident had entered into a composite contract with the resident party making the payments. The said composite contract not only comprised supply of plant, machinery and equipment in India, but also comprised the installation and commissioning of the same in India. It was admitted that the erection and commissioning of plant and machinery in India gave rise to income taxable in India. It was, therefore, clear even to the payer that payments required to be made by him to the non-resident included an element of income which was exigilble to tax in India. The only issue raised in that case was whether TDS was applicable only to pure income payments and not to composite payments which had an element of income embedded or incorporated in them. The controversy before us in this batch of cases is, therefore, quite different. In Transmission Corporation case (supra) it was held that TAS was liable to be deducted by the payer on the gross amount if such payment included in it an amount which was exigible to tax in India. It was held that if the payer wanted to deduct TAS not on the gross amount but on the lesser amount, on the footing that only a portion of the payment made represented “income chargeable to tax in India”, then it was necessary for him to make an application under Section 195(2) of the Act to the ITO(TDS) and obtain his permission for deducting TAS at lesser amount. Thus, it was held by this Court that if the payer had a doubt as to the amount to be deducted as TAS he could approach the ITO (TDS) to compute the amount which was liable to be deducted at source. In our view, Section 195(2) is based on the “principle of proportionality”. The said sub-Section gets attracted only in cases where the payment made is a composite payment in which a certain 12 | P a g e proportion of payment has an element of “income” chargeable to tax in India. It is in this context that the Supreme Court stated, “If no such application is filed, income-tax on such sum is to be deducted and it is the statutory obligation of the person responsible for paying such ‘sum’ to deduct tax thereon before making payment. He has to discharge the obligation to TDS”. If one reads the observation of the Supreme Court, the words “such sum” clearly indicate that the observation refers to a case of composite payment where the payer has a doubt regarding the inclusion of an amount in such payment which is exigible to tax in India. In our view, the above observations of this Court in Transmission Corporation case (supra) which is put in italics has been completely, with respect, misunderstood by the Karnataka High Court to mean that it is not open for the payer to contend that if the amount paid by him to the non-resident is not at all “chargeable to tax in India”, then no TAS is required to be deducted from such payment. This interpretation of the High Court completely loses sight of the plain words of Section 195(1) which in clear terms lays down that tax at source is deductible only from “sums chargeable” under the provisions of the I.T. Act, i.e., chargeable under Sections 4, 5 and 9 of the I.T. Act.

11. Before concluding we may clarify that in the present case on facts the ITO (TDS) had taken the view that since the sale of the concerned software, included a license to use the same, the payment made by appellant(s) to foreign Suppliers constituted “royalty” which was deemed to accrue or arise in India and, therefore, TAS was liable to be deducted under Section 195(1) of the Act. The said finding of the ITO(TDS) was upheld by the CIT(A). However, in second appeal, the ITAT held that such sum paid by the appellant(s) to the foreign software Supplier was not a “royalty” and that the same did not give rise to any “income” taxable in India and, therefore, the appellant(s) was not liable to deduct TAS. However, the High Court did not go into the merits of the case and it went straight to conclude that the moment there is remittance an obligation to deduct TAS arises, which view stands hereby overruled.”

10. Hon’ble Supreme Court in GE India Technology Centre (supra) has explained the scope and ambit of section 195 of the Act. Hon’ble Apex Court has categorically held that the expression “any other sum chargeable under the provisions of the Act” in section 195 of the Act was elucidated and explained by holding that if payment is made in respect of 13 | P a g e the amount, which is not chargeable to tax under the provisions of the Act, the TDS is not liable to be deducted. Hon’ble Apex Court further observed that the decision in Transmission Corporation (supra) is applicable when the sum or payment is chargeable to tax under the provisions of the Act. In such cases, TDS has to be deducted on the gross amount of payment and not merely on the taxable amount.

Nothing has been brought before us to conclude that the assessee’s foreign commission agent was liable to pay tax in India. Hon’ble Apex Court has categorically held that the facts of Transmission Corporation (supra) are on different issue.

“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 40a(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 without deduction of tax is attracted disallowance under section 40a (ia) of the Act or not. We find that the CBDT by its recent Circular No.7 dated 22nd October, 2009 withdrawn its earlier Circulars Nos.23 dated 23-7-2009, 163 dated 29th May, 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-resident entities, and who render services only at 14 | P a g e 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 CIT vs. Toshoku Limited reported in 125 ITR 525.

11. It is well settled law that the provisions of Double Taxation Avoidance Agreement would prevail over the provisions of the Income-tax Act, would seem to have been completely not followed by Karnataka High Court while rendering the judgment in the case of Samsung Electronics (supra). Therefore, in our considered opinion, the law related to deduction of tax at source under section 195 has not been changed consequent to the judgment of Samsung Electronics (supra) or withdrawal of earlier Circulars, on this issue by the CBDT and therefore the rigors of section 40a (ia) of the Act, disallowance of expenditure, is not attracted for the payments made to the overseas agents by the 16 | P a g e

assessee without deduction of TDS. In the case under consideration, the CIT [A] observed that the assessing officer has not been able to establish that there are specific intention of the payee to receive the payment within the territory of India as per the decision in the case of Oagle Glass Works [supra], therefore, in our opinion, the CIT (A) rightly did not agree with the view taken by the assessing officer with regard to the addition made on this issue and hence, the CIT (A) is justified in directing the assessing officer to delete the said addition. After considering the totality of facts and the circumstances of the case, we are not inclined to interfere with the order of the CIT (A) on this issue and accordingly the same is upheld. Hence the grounds raised by the revenue for all the years under consideration are rejected.”

17 | P a g e Technology (supra). Respectfully following the aforesaid precedents, we do not find any error of fact or law in the impugned order passed by learned CIT(A). The aforesaid point is accordingly determined in favour of the assessee and against the revenue.

Order pronounced in the open court on 15.01.2026.