ACIT 6(3), MUMBAI vs. LUCID COLLOIDS LTD, MUMBAI

The assessee in its appeal is aggrieved for disallowance of Rs.1,18,39,722/- paid towards commission on export sales. The AO 2 disallowed commission paid to the non-resident agents of Rs.1,18,39,722/- on export sales. AO made the disallowance u/s.40(a)(i) of the Act on the ground of non-deduction of tax at source. By the impugned order CIT(A) confirmed the disallowance.

We have considered rival contentions and found from the record that the assessee has paid commission to agents situate outside India for export sales made by the assessee company. The assessee company continues to be in the business of manufacture and sale of guar gum powder and its derivatives in local and export markets. The assessee company does not have any office branch outside India. The export sales are made through the contacts of agents. The agents, situate in foreign countries, identify the potential customers. The agent thereafter introduces the assessee company to the potential customers. The assessee company thereafter interacts with the potential customer. The agent co-ordinates with the assessee company in regard to the orders placed by the customers and supply of material. The agent also facilitates and assists the assessee company in collection of sale proceeds, if required. Thus the export sales are made to a party outside India through the services rendered by the agent outside India. The commission is paid to agents outside India for the purpose of earning any income from any source outside India.

The said payment are covered by Circular Nos.23 dated 23rd July, 1969 and No. 786 dated 7th February, 2000 in this regard which clarifies that commission to the non-resident agent operating outside the country, 3 where no part of his income arises in India, would not be taxable in India. However, the AO ignored these Circulars on the plea that these circulars have been withdrawn by CBDT vide Circulars No.7/2009. However, these two Circulars were withdrawn on 22nd October, 2009 but were in force during the previous year relevant to the assessment year 2009-2010 i.e. year under consideration and hence are binding on the Income Tax Department for the year under consideration.

The issue under consideration is also squarely covered by the decision of coordinate bench in the case of Indo Industries Ltd. 53 taxman.com 458, wherein it was held that commission paid to one agent having no PE in India, are not liable to tax in India as no taxable income accrues or arose to such agents in India, therefore, the assessee was not required to deduct tax at source while making payment to such commission agent. In view of the above, we do not find any merit in the disallowance so made by the AO. Accordingly, the appeal of the assessee is allowed.

The revenue in its appeal is aggrieved by the action of CIT(A) for re-working out disallowance u/s.14A/36(1)(iii). From the record we found that the CIT(A) has restored the matter back to the file of AO after following the order of the coordinate bench in assessee’s own case for the assessment year 2004-05 and 2006-07 dated 31-10-2011. The precise observation of the CIT(A) are as under :- “3.5. Respectfully following the order of the Hon' ble ITAT dated 31/10/2010 passed on the appellant's own case for AY 2004-05 and 2006-07 and agreeing with the findings as given in the appellate order for AY 2007-08 dated 7/6/2012 of CIT(A), it is held that the 4 action of the AO in making the additions under the sections under discussion is upheld but to maintain a rule of consistency and to bring the correct income to taxation, the AO is directed to take necessary action regarding the calculation of the quantum of disallowance that has to be made in the case of the appellant following the directions as given in AY 2007-08 by the CIT(A). Here the AO is also directed to ensure that in the recalculation so done, double disallowance of the same expenditure claimed does not occur. This ground of appeal

7. We have considered rival contentions and found that there is no infirmity in the order of CIT(A) for restoring the matter back to the file of AO for recalculating the disallowance u/s.14A/36(1)(iii) as per the directions given by the Tribunal in its order dated 31-10-2011. Accordingly, the appeal of revenue is dismissed.