CENTRAL ELECTRONICS LTD.,UTTAR PRADESH vs. DCIT, NEW DELHI

Appellant by Sh. R.S. Singhvi, CA Respondent by Ms. Rakhi Vimal, Sr. DR Date of hearing 05.01.2016 Date of pronouncement 24.02.2016 ORDER PER O.P. KANT, A.M.: This appeal of the assessee is directed against the order dated 06.11.2013 of the ld. CIT(A)-VI, New Delhi, passed for the assessment year 2010-11, raising following grounds of appeal:

1. That the ld. CIT(A) erred in law and on facts in confirming the addition made by the AO of Rs. 32,27,844/- u/s 42(a)(i) of the Act by wrongly rejecting the assessee’s contention.

2. That the ld. CIT(A) erred in law and on facts in confirming the addition made by the AO of Rs. 690,348/-, u/s. 43B/36(1)(ia) of the Act by wrongly rejecting the assessee’s contention.

3. That the ld. CIT(A) wrongly rejected the assessee’s submissions filed during the assessment proceedings and appeal proceedings in support of the claimed deduction/additions.

4. That the order of the ld. CIT(A) is bad in law and against the fact of the case. 2. The facts in brief are that the assessee , a 100% Government owned company under the Department of Scientific and Industrial Research (DSIR), was engaged in manufacturing of electronic products in the previous year relevant to the assessment year . The assessee company filed its return for the year under consideration declaring taxable income of Rs. 92,06,580/- on 14.10.2010, which was revised to Rs. 37,36,358/- on 16.03.2011. The assessee company again revised its return of income on 03.12.2011 to Rs. 6,76,282/-. The case was taken up for scrutiny and notice under Section 143(2) of the Income- tax Act, 1961 (for short “the Act”) was issued. In the scrutiny assessment under Section 143(3) of the Act, the Assessing Officer made disallowance for commission on exports of Rs. 32,27,884/- under Section 40(a)(i) of the Act and disallowance for late deposit of employees’ contribution to Employee’s State Insurance (ESI) payment of Rs. 60,348/- under section 43B/36(1)(va) of the Act along with other additions made. Aggrieved, the assessee field an appeal before the Commissioner of Income Tax(Appeals) who sustained the additions in respect of disallowance of commission on exports and late payment of ESI contribution. Aggrieved, the assessee is in appeal before us. 3. In ground no. 1, the assessee has challenged the addition of Rs. 32,27,844/- under Section 40(a)(i) of the Act. In the course of the scrutiny proceedings, the Assessing Officer observed that the assessee paid commission on exports to non-resident person but no tax was deducted at source on said commission expenses claimed in the profit and loss account. The assessee submitted before the Assessing Officer that in order to explore market for the products in countries like Mali, Sudan etc., the assessee made agreement with the foreign agent to procure orders from their Government on a fixed commission at specified percentage on sale. Further, the assessee submitted that the commission paid of Rs. 32,27,884/- was to a foreign agent, who was a tax resident of Mali & Sudan and the foreign resident was not having any liability to pay any Indian income- tax on the remittance received by him abroad, therefore, no tax was deductible on the payment to non-resident commission agents. Further relying on the CBDT Circular No. 786, dated 07.02.2000, the assessee submitted that the foreign agent operated outside the country and hence no part of services was rendered in India and the payment was also remitted directly to abroad, thus, the provisions of Section 195 of the Act was not applicable on the payment made, therefore, no disallowance could be made under Section 40(a)(i) of the Act. However, the learned Assessing Officer was of the view that the services rendered by the assessee were falling under Section 9(1)(vii) of the Act as fee for technical services and according to section 195 of the Act, the obligations was casted upon the assessee to apply for no deduction of TDS or lesser deduction of TDS to the Assessing Officer and the assessee failed to do so, thus, he disallowed the expenditure of Rs. 32,27,884/- on export commission under section 40(a)(i) of the Act. In appeal before the learned Commissioner of Income Tax(Appeals), the assessee pleaded that the services of the commission agent was not in the nature of ‘fee for technical service’ as held by the AO as per Section 9(1)(vii) of the Act, because nothing was made available by the commission agent while delivering the service. Learned Authorized Representative further submitted that providing of services by the non-resident commission agent to the assessee did not result into any transfer of any knowledge, skill or technology to be considered as fee for technical services to the assessee. However, the Commissioner of Income Tax(Appeals) was of the view that a business / professional connection between the assessee and the non- resident existed as required under section 9(1) of the Act and source of income was situated in India and the right to receive the commission arose in India. He also observed that the memorandum of agreement with the foreign commission agent was governed by the laws of India and even the seat of arbitration was at New Delhi. He further observed that the payment of commission was not in the nature of reimbursement of any expenses and, therefore, the tax was required to be deducted at source from payment under Section 195 of the Act, which was remitted by the resident assessee company to its non-resident agents, irrespective of the fact as to whether non-resident agents maintain Permanent Establishment (PE) in India or whether services were rendered abroad or whether commission was received aboard. Accordingly, he confirmed the addition made by the Assessing Officer.

3.1 Before us, the learned Authorized Representative submitted that the provisions of Section 195 of the Act are applicable only when interest or any other sum is chargeable under the provisions of Act, in the hands of the recipient. He submitted that the commission agent was a foreign tax resident and no part of services were rendered in India, therefore, no income accrued or arose to the foreign tax resident in India in terms of Section 5(2) or Section 9(1) of the Act and sum paid as commission to agents was not chargeable to tax in India in the hands of the foreign tax agent. He further relied on the judgment of Hon’ble Delhi High Court in the case of Commissioner of Income Tax Vs. Angelique International Ltd., 359 ITR 9 (2013) (Del) and Commissioner of Income Tax Vs. EON Technology Pvt. Ltd., 343 ITR 366 (2013) (Del). He also relied on the decision of the Tribunal in the case of Asstt. Commissioner of Income Tax Vs. M/s. Northern Tannery, wherein similar issue has been decided in favour of the assessee. 3.2 On the other hand, learned Sr. Departmental Representative relied on the findings of the lower authorities. 3.3 We have heard the rival submissions and perused the material on record. The assessee has obtained services of foreign tax residents for getting export order in a foreign country. The services of procuring export orders for the assessee has arose income in the hands of foreign agent. The only issue in dispute is whether those services are liable for tax deduction at source. In the case of Angelique International Ltd. (supra), the Hon’ble High Court after Circulars issued by the CBDT and judgments of various High Courts and Supreme Court, held as under: “…………………………………. In the light of the judgments of the Supreme Court in Commissioner of Income Tax Vs. Eli Lilly and Co. (India) P. Ltd. [2009], 312 ITR 225 (SC) and GE India Technology Centre P. Ltd. Vs. Commissioner of Income Tax [2010] 327 ITR 456 (SC), once the income was not exigible or chargeable to tax, TDS was not required to be deducted. Money paid to the third parties, who did not have any office or permanent establishment in India, was exempt and not chargeable to tax. Thus, on the said payments or income, TDS was not required to be deducted. We also note that the payments in question were made prior to Circular No. 7 of 2009. On this aspect, there is no dispute. We, therefore, no not find any reason to interfere with the order passed by the Tribunal deleting the addition made by the Assessing Officer under Section 40a(i) of the Act. The appeal, being devoid of merit, is dismissed.” 3.4 Further, in the case of EON Technology Pvt. Ltd. (supra), the Hon’ble Delhi High Court has discussed all the relevant provisions and Circulars issued by the CBDT and held as under: “5. The scope and ambit of Section 195 of the Act has been explained by the Supreme Court in GE India Techonology Centre (P) Ltd. vs. CIT (2010) 327 ITR 456. In the said case the expression "any other sum chargeable under the provisions of the Act" in Section 195 of the Act was elucidated and explained. It was held that if payment is made in respect of the amount which is not chargeable to tax under the provisions of Act, tax at source (TDS, for short) is not liable to be deducted. Decision of Supreme Court in Transmission Corporation of Andhra Pradesh vs. CIT, (1999) 239 ITR 587 (SC), operates and 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 made and not merely on the taxable income included in the gross amount. The said decision would not apply in case payment is made but the said sum in entirety is not chargeable or exigible to tax under the provisions of the Act. The said distinction has been rightly understood by the first appellate authority and the ITAT and correctly applied by them.” ( emphasis supplied)

3.5 Further in the case of M/s. Northern Tannery (supra), wherein also non- resident was appointed as commission agent for sale of products, the Tribunal held that since the assessee had simply procured export orders through commission agent for which the commission was paid, the assessee was not required to deduct tax at source on the commission paid to the foreign agent. 3.6 In view of the above ratios of the Courts and Tribunal, we are of the view that the tax at source under Section 195 of the Act is deductible only, if the case of the assessee falls under the expression ‘any other sum chargeable under the provisions of the Act. We find from the facts of the case that the foreign commission agent has rendered services in a foreign country for procuring export orders for the assessee and no income accrued or arose to the assessee in India; therefore, no sum is chargeable to tax in India. It is not material that where the agreement was signed or where the place of arbitration was fixed, but what is material is, that where the service were rendered. The Revenue has failed to establish that between the assessee and the non-resident there existed any business or professional connection in India and thus no income accrued or arose to the non-resident in India. Further we find that in the case of the assessee, the entire sum was not chargeable to tax and thus the judgment of the Transmission Corporation of Andhra Pradesh vs. CIT (supra) is not applicable to the facts of the assessee as held by the jurisdictional High Court in the case of EON Technology Pvt. Ltd. (supra). We find that the facts of the case are identical to the facts of the case of M/s. Northern Tannery (supra), therefore, Tribunal in said case , we are of the opinion that no tax was required to be deducted on the commission expenditure towards procuring export orders by the assessee. Therefore, we hold that no disallowance can be sustained under Section 40(a)(i) of the Act. Accordingly, this ground of the assessee is allowed.