Income Tax Appellate Tribunal - Delhi
Acit, New Delhi vs M/S. Punjab Stainless Steel ... on 9 April, 2018
INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH "F": NEW DELHI
BEFORE SHRI JOGINDER SINGH, JUDICIAL MEMBER
AND
SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER
ITA No.6043/Del/2014
A Y 2010-11
Punjab Stainless Steel Vs ACIT
Industries Circle - 19(1)
B-61, Wazirpur, Industrial New Delhi
Area, New Delhi -110052
(Appellant) (Respondent)
ITA No. 5997/Del/2014
A Y 2010-11
ACIT Punjab Stainless Steel
Circle - 19(1) Vs. Industries
New Delhi B-61, Wazipur
Industrial Area,
New Delhi 110052
(Appellant) (Respondent
Appellant by : Sh. Atiq Ahmad, Sr. DR
Respondent by: Sh. Hari Mitter, CA
Date of Hearing 02/04/2018
Date of pronouncement 09/04/2018
ORDER
1
Per Prashant Maharishi, Accountant Member
1. These are the cross appeals filed by the assessee and revenue against the order of The Commissioner of Income Tax (Appeals) - XXII, New Delhi for A. Y. 2010-2011 passed on 27.06.2014.
2. The ITA No. 6043/Del/2014 is preferred by assessee raising the following two grounds of appeal :
1. That on the facts and in the circumstances of the case, the Id.
Commissioner (Appeals) has earned in sustaining disallowance of Rs. 9,95,122/- being 7.5% of the total Polishing charges of Rs. 1,32,68,297/- paid by the appellant during the year under appeal.
2. That on the facts and in the circumstances of the case, in confirming disallowance of Rs.59,931/- out of deprecation by reducing the brought down W.D.V. of the block of assists on which 15% disallowance being allowed since the purchase of Assets to 10%.
3. That on the facts and in the circumstances of the case, in estimating and assessing being allegedly notional interest calculated on old brought forward interest free advances aggregating to Rs. 25, 97,038/- ignoring the facts that there was old advances since earlier years on which no notional interest was ever assessed and where appellant had its own interest free funds aggregating to over Rs. 23.44 Crores.
4. The revenue has filed appeal raising following two grounds in ITA No. 5997/Del/2014 :
1. The Ld. CIT(A) erred in law and on facts in restricting the disallowance out of polishing charges to the extent of 7.5% of total polishing charges despite assessee failed to justify the claim with evidence.
2. The Ld. CIT (A) erred in law and on facts in deleting the additions of 2 foreign commission of Rs. 47,77,826/- on account of non deduction of TDS.
5. Brief facts of the case are that assessee is a partnership firm engaged in the manufacturing and export of stainless steels, utensils, and cutleries items etc. The assessee filed its return of income on 14.10.2010 for Rs. 11658590/- .
Assessment u/s 143(3) was made by the Ld. ACIT, Circle - 9 (1), New Delhi at Rs. 23436144/-. The assessee challenged the order of the ld AO before the Ld. CIT (A) who deleted certain additions, disallowance and confirmed part of them by his order dated 27.06.2014. Therefore, both the parties aggrieved by that order are in appeal before us.
6. We first take up the appellant of the assessee. The first ground of appeal is against disallowance of Rs. 995122/- being 7.5% of the total polishing charges of Rs. 13268297/-. The brief facts of the issue shows that before the Assessing Officer assessee was asked to furnish the complete details along with confirmation of persons who had done the polishing work during the year. The assessee submitted in all 18 names along with their addresses, permanent account number and amount paid along with quantitative details of polishing. The Ld. Assessing Officer issued notice u/s 133 (6) of the Act.
Some of the letters return unserved and some of the parties reply was not received. Some of the confirmations were received. Therefore, the show cause notice for disallowance of the above sum was issued to the assessee.
Assessee produced 3 out of 18 parties before the Assessing Officer.
3Therefore, the Ld. Assessing Officer disallowed 50% of total polishing charges amounting to Rs. 6634148/-..
7. The assessee preferred appeal before the Ld. CIT (A) who confirmed disallowance to the extent of 7.5% of the total polishing charges of Rs.
13268297/-. Therefore, assessee is now contesting the above disallowance confirmed by the ld CIT (A).
8. The Ld. AR vehemently submitted that out of the total 18 parties the assessee could d submit the confirmation of all the parties. He stated that only Rs. 1095707/- remains unconfirmed, he therefore, submitted that the disallowance of Rs. 995122/- despite the confirmation furnished by the assessee being 7.5 % of the total expenditure is unjustified.
9. The Ld. DR submitted that the disallowance confirmed by the CIT (A) is proper. He further stated that in identical situation in assesses own case for earlier years the addition has been sustained. Furthermore, he pressed the connected round of appeal of revenue where ld AO is aggrieved by order of Ld. CIT (A) regarding restricting the disallowance to the extent of only 7.5% of the total Polishing Charges. He vehemently supported the order of ld AO.
10. We have carefully considered the rival contentions and also perused the orders of the lower authorities. In the present case, the Ld. CIT (A) had discussed the above issue in para No. 8 of his order. Ld. CIT (A) has obtained the remand report of the Ld. AO and after admitting the additional evidence, It was held that assessee could get the payments confirmed from 4 only 8 out of 18 parties amounting to 91.44 % of the Polishing Charges and therefore, according to him the disallowance is required to be made. He further held that in case of the assessee the coordinate bench in earlier years have decided the identical issue 50% of the disallowance of total expenditure made by the Assessing Officer, which was restricted to 15% by the CIT (A), was upheld. Therefore, we are also of the opinion that some disallowance is required to be upheld on the facts of the present AY and the history of the assessee in previous A.Y. In the present case, the Ld. CIT (A) after discussion of the whole issue in detail in para No. 9 to 9.21 has restricted the disallowance to 7.5 % of the total payment. In the details submitted by the assessee before us the assessee also could not submit the confirmation with respect to total payment of Rs. 1095707/-. In the earlier case decided by the coordinate bench the total payment made by the assessee for Polishing Charges was of Rs. 3.02 crores whereas in the present case the total payment is only of Rs. 1.32 crores. In that particular case the Ld. Assessing Officer only filed addresses of 16 parties out of 300 and confirmation could only be filed in case of 9 parties. In the present case, the assessee has submitted confirmation of only 10 parties with respect to the payment of Rs.
10.95 lakhs could not be submitted. In that particular case the Ld. Assessing Officer did not enquire u/s 133 (6) of the Act whereas in the present case the Ld. Assessing Officer also invoked the 133 (6) powers and obtained confirmation directly and to that extent the he allowed the expenses.
This it proves that substantially assessee has proved the payment of 5 Polishing Charges with respect to its genuineness. In the present case, the assessee could not produce the confirmation from some of the parties.
However, the quantitative details submitted by the assessee of the Polishing Charges. The details furnished at page 21 of the paper book shows that in all the cases the assessee has submitted the permanent account number of the job workers except in 2 cases where the payment is only of Rs. 19,500/-
and Rs. 9944/-. Further in all the cases the assessee has deducted tax at source on payment made to those job workers. No details submitted by the assessee are disputed. Merely because of the reason that those parties did not respond the notices u/s 133 (6) enquiry letter, it cannot be used against the assessee to disallow those expenses , when permanent account number of those persons are provided and when the assessee has also deducted tax at source on those payments. In view of this, we are of the opinion that Ld. CIT has upheld disallowance 7.5 % of the total payment is on higher side and therefore to that extent unjustified. Because of the above facts, we direct the Ld. Assessing Officer to limit disallowance only to the extent of 5% of the total expenses. In view of this ground, No. 1 of the appeal of the assessee is partly allowed.
11. Ground no 1 of the appeal of the revenue is contesting the disallowance made by the ld AO of the 50 % of the total expenses to 7.5 % of the total expenses. The Revenue's this ground deserved to be dismissed for the single reason that in earlier years disallowance was restricted to 15 %.
Further, as we have narrated the complete facts of the case while deciding 6 the above ground of the appeal of the assessee, where in the facts are quite better compared to the year in which 15 % disallowance was confirmed, we have reduced it to 5 % in assessee's appeal. Hence, ground No. 1 of the appeal of the revenue is dismissed. . Therefore, we dismiss the ground No.1 of the appeal of the revenue.
12. The ground No. 2 of the appeal of the assessee is against confirmation of disallowance of Rs. 59931/- by reducing the WDV of the block of the asset.
The brief facts of the case shows that assessee has claimed depreciation of electrical fittings @ 15% whereas the Ld. Assessing Officer observed that the correct rate of depreciation is 10% as it falls under the classification of "
Furniture & fittings". On appeal before the CIT (A), the same was confirmed.
13. The Ld. AR submitted that it is confirming part of the block of the asset from the earlier years. In opening balance, the rate of depreciation was 15 %.
14. The Ld. DR submitted that depreciation has been correctly allowed by the Assessing Officer at the appropriate rates, as assessee has not shown how the rates of 15 % can be applied to it.
15. We have carefully considered the rival contentions and find that applicable rate of depreciation on electrical fittings is 10% and not 15% as claimed by the assessee as it falls under the category of 'furniture and fittings". .The Assessee has not shown before the lower authorities that electrical fittings are falling in the classification of 'Plant and Machineries." to qualify as deduction at the higher rate of depreciation. . In view of this we do not find 7 any infirmity in the order of CIT (A) hence, ground No.2 of the appeal of assessee is dismissed.
16. The ground No. 3 of the appeal is against confirmation of disallowance of interest of Rs. 2597038/- despite assessee has interest refunds available of Rs. 23.44 crores. The Ld. Assessing Officer noted that assessee has given advance of Rs. 25.97 lacs to 7 different parties. The assessee could not justify the business expediency of giving interest free loans to this parties and therefore. The Ld. Assessing Officer computed interest at the rate of 12% to be disallowed of the interest paid by the assessee. Hence, Assessing Officer computed the disallowance of Rs. 311465/-. The Ld. CIT (A) also confirmed the disallowance.
17. The Ld. AR submitted that assessee has interest free funds available with him amounting to Rs. 23.44 crores as partners current account on which no interest is paid. He therefore, submitted that no interest disallowance can be made.
18. The Ld. DR submitted that the above issue has been decided against the assessee in assessees own case by Hon'ble Delhi High Court in 3 to 4 ITR 396 therefore, disallowance is to be upheld.
19. We have carefully considered the rival contentions. In the assesses own case in 324 ITR 396 the Hon'ble Delhi High Court has upheld the interest disallowance for the reason that assessee could not establish that there was any commercial expediency. In the present case the assessee is raising a argument that assessee has more interest free funds available then the 8 amount of interest free advances given to other parties. The assessee has also submitted that copy of the balance sheet where the assessee has partners current account balances, on which assessee has submitted that no interest has been paid, exceeds the amount of advance given interest free.
The Hon'ble Bombay High Court in case of Reliance Utilities Ltd. 313 ITR 340 has held that if the assessee has more interest free funds then advances given free of interest for that case presumption is available to the assessee that amount is advance out of non interest bearing funds. In view of this disallowance of Rs. 3113654/- out of interest expenditure is not sustainable. However, there is also a statement that assessee has paid interest on Fixed capital of partners. This fact requires to be verified. In the result ground, No. 3 of the appeal is set aside to the file of ld AO where the assessee is directed to show that assessee has interest free funds available in the form of partner's current account. Accordingly, this ground is allowed with above direction.
20. This leaves us with the ground No. 2 of the appeal of the revenue wherein the Ld. CIT (A) has deleted the disallowance of Foreign Commission expenditure of Rs. 4777826/- . The assessee has paid Foreign Commission and has not deducted tax at source u/s 195 of the Income Tax Act. The assessee submitted that no tax is required to be deducted as no part of the income arises in India. The Ld. CIT (A) deleted the above addition. The Ld. AR relied on the order of the CIT (A) and Ld. DR relied upon the order of the Ld. Assessing Officer.
921. We have carefully considered the rival contentions. In the present case the Ld. CIT (A) has given a detailed finding that Foreign Commission paid by the assessee has not chargeable to tax in India in para No. 12 of his order which is under :-
12. Foreign Commission 12.1 I have carefully considered the observations of the Assessing Officer and the submissions by the Learned Counsel of the Appellant. It is an undisputed fact that the Appellant has paid Commission to Non- Resident/foreign Agents namely M/s A1 Mehtab Trading Co. Ltd., Dubai, UAE, and M/s Global Purchasing Inc., New Jersey, USA, due on export orders procured by them.
These foreign Commission Agents are not resident in India. These Agents operate their activities outside India in their own countries i.e. UAE & USA and no part of their activities arises in India. They were was paid Commission which relates to services provided to the Appellant from outside India. These Agents did not have any Permanent Establishment or permanent place of business place in India. It is not the case of the Ld. Assessing Officer that there was any Permanent Establishment (PE). The Commission was remitted directly to these Agents directly outside India and not received by them or on their behalf in India by any third party.
12.2 Section 195 of the Income tax Act 1961 requiring any person responsible for paving to a non-resident any interest or any other sum, to deduct tax on foreign payments i.e. sum paid by Resident to Non Resident, comes in to force only when the payment made to the nor- resident is his income chargeable under Indian Income tax Law. Therefore TDS liability on such Commission is an offshoot from its chargeability to Income tax under Section 5(2) of the Act. For a proper appreciation, relevant part of Section 195 of the Income-Tax Act, 1961 is reproduced hereunder :-
"(1) Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest or any other sum chargeable under the provisions of this Act (not being income 10 chargeable under the head "Salaries") shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force :
Provided that in the case of interest payable by the Government or a public sector bank within the meaning of clause (23D) of section 10 or a public financial institution within the meaning of that clause, deduction of tax shall be made only at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode :
Provided further that no such deduction shall be made in respect of any dividends referred to in section 115-0.
Explanation--For the purposes of this section, where any interest or other sum as aforesaid is credited to any account, whether called "Interest payable account" or "Suspense account" or by any other name, in the books of account of the person liable to pay such income such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly.
(2) Where the person responsible for paying any such sum chargeable under this Act (other than salary) to a non-resident considers that the whole of such sum would not be income chargeable in the case of the recipient, he may make an application to the Assessing Officer to determine, by general or special order, the appropriate proportion of such sum so chargeable, and upon such determination, tax shall be deducted under sub-section (1) only on that proportion of the sum which is so chargeable."
12.3 It is apparent that under Section 195 of the Income-tax Act, 1961, an obligation is cast on a person making payment to a non-resident of any sum, which is chargeable under the provisions of the Act, to deduct tax at the rates in force, at the time of payment of such sum or at the time of credit thereof to the account of the payee, whichever is earlier. As per the aforesaid provision, tax is required to be withheld in respect of payments made to a non-resident only if such payment is chargeable to tax in India. The Hon'ble Supreme Court in the case of GE India Technology Centre (P) Ltd vs. CIT, 327 ITR 456, explaining its earlier decision rendered in the case of Transmission Corporation of AP vs. CIT, 239 ITR 587, held that only if the income is chargeable to tax in India in the hands of the non-resident recipient, would tax be required to be deducted at 11 source from such payment. It is, therefore, imperative to first analyze whether the commission paid by the appellant to the commission agents is chargeable to tax in India. Only if the answer to the said question is in the affirmative, then the provisions relating to withholding tax under section 195 of the Act shall be applicable.
12.4 The liability of a non resident to be taxed in India is provided as per Section 5(2) of the I.T. Act, according to which the total income of any previous year of a person who is a non resident includes all income from whatever source derived being :
(a) income which is received or is deemed to be received in India by or on behalf of such person in such year, or
(b) income which accrues or arises or is deemed to accrue or arise in India to such person during such year.
12.5 Thus Section 5(2) is the charging section for taxing income of non residents. This Section provides for two situations, the first being receipt of income in India and the second being income accruing or arising or deemed to be accruing or arising in India. In the present case, the first situation being the receipt of income in India is ruled out since payment of Commission is made directly outside India, but the second situation i.e. income accruing or arising or deemed to accrue or arise requires deliberation.
12.6 In the present case, it is observed that the non resident agents did not receive the Commission in India, so it cannot be said that they had received any income in India. Further, Section 7 of the Income Tax Act lists the income which is deemed to be received in India and this does not include Commission income. Therefore, it can also not be said that the impugned Commission income has accrued or arisen to the Non Resident agent in India. The aforesaid Commission payment may, however, be deemed to accrue or arisen in India under -
(i) section 9(1 )(i) of the Act if the commission agent has a 'business connection' in India and the income arises through such 'business connection' or
(ii) section 9(1 )(vii) of the Act if the services rendered by the commission agent could be characterized as defined in Explanation 2 to that section.
12.7 The concept of 'business connection' was dealt with in the decision of Hon'ble Supreme Court in the case of CIT vs. R.D. 12 Aggarwal & Co. & Anr., 56 ITR 20, wherein the Apex Court held that a business connection "involves a relation between a business carried on by a non resident which yields profit or gains and some activity in the taxable territories which contributes directly or indirectly to the earning of those profits or gains. It predicates an element of continuity between the business of the non-resident and the activity in the taxable territories". Given the above definition, a case can be made out by an Assessing Officer that there does exist a business connection between an Indian concern and the non resident agent. However, it is clear from perusal of Explanation 1 of Section 9(1)(i) that the income of the business to accrue or arise in such a scenario is only such part that can reasonably be attributed to operations carried out in India. Since, in the present case of the Appellant, the non- resident Agents did not have a permanent establishment in India, no part of the Commission income of the Agents can be said to have accrued or arisen in India. The Commission Agents, in the present case, rendered services outside India for promotion of sales of Stainless Steel Utensils etc. exported by the Appellant. The Commission retained by the non-resident Agents, therefore, did not arise on account of any 'business connection' of the Commission Agents in India and cannot, therefore, be deemed to accrue or arise in India under section 9(1 )(i) of the Act.
12.8 A very relevant decision in this regard is the judgment of the Hon'ble supreme Court in the case of CIT v. Toshuku Ltd, 125 ITR 525, wherein the Apex Court held that the Commission amounts which were earned by the non-residents for services rendered outside India could not be deemed to be income, which had accrued or arisen in India in terms of section 9(1 )(i) of the Act. The relevant observations of the Apex Court are as under:
"In the cases before us, there were no terms corresponding to the term extracted above which was found in the agreements between the assessee and the Japanese company in Raghava Reddi's case [1962] 44 ITR 720 (SC). It cannot be said that the making of the book entries in the books of the statutory agent amounted to receipt by the assessees who were non- residents as the amounts so credited in their favour were not at their disposal or control. It is not possible to hold that the non-resident assessees in this case either received or can be deemed to have received the sums in question when their accounts with the statutory agent were credited, since a credit balance, without more, only represents a debt and a mere book entry in the debtor's own books does not constitute payment which will secure discharge from the debt. They cannot, therefore, be charged to tax on the basis of receipt of income actual or constructive in the taxable territories during the relevant accounting period.
The second aspect of the same question is whether the commission amounts credited in the books of the statutory agent can be treated as incomes accrued, arisen, or deemed to have accrued or arisen in India to the non- resident assessees during the relevant year. This takes us to s. 9 of the Act.13
It is urged that the commission amounts should be treated as incomes deemed to have accrued or arisen in India as they, according to the department, had either accrued or arisen through and from the business connection in India that existed between the non-resident assessees and the statutory agent. This contention overlooks the"effect of cl. (a) of the Explanation to cl. (i) of sub-s. (1) of s. 9 of the Act which provides that in the case of a business of which all the operations are not carried out in India, the income of the business deemed under that clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India. If all such operations are carried out in India, the entire income accruing there from shall be deemed to have accrued in India. If however, all the operations are not carried out in the taxable territories, the~profits arnt gains of business deemed to accrue in India through and from Eusmeis' connection in India shall be only such profits and gains as are reasonably" attributable to that part of the operations carried out in the taxable territories. If no operations of business are carried out in the taxable territories, it follows that the income accruing or arising abroad through or from any business connection in India cannot be deemed to accrue or arise in India (See CIT v.R. D. Aggarwal and Co. [19651 56 ITR 20 (SC) and Carborandum Co. v. CIT [19771108 ITR 335 (SC) which are decided on the basis of s. 42 of the Indian I.T. Act, 1922, which corresponds to s. 9(1 )(i) of the Act).
In the instant case, the non-resident assessees did not carry on any business operations in the taxable territories. They acted as selling agents outside India. The receipt in India of the sale proceeds of tobacco remitted or caused to be remitted by the purchasers from abroad does not amount to an operation carried out by the assessees in India as contemplated by cl. (a) of the Explanation to s. 9(1 )(i) of the Act. The commission amounts which were earned by the non-resident assessees for services rendered outside India cannot, therefore, be deemed to be incomes which have either accrued or arisen in India. The High Court was, therefore, right in answering the question against the department.
For the foregoing reasons, the appeals fail and are hereby dismissed with costs".
12.9 The Hon'ble Delhi High Court in CIT v. EON Technology (P) Ltd, 343 ITR 366 following the decision of the Apex Court in CIT vs. Toshuku Ltd., 125 ITR 525 held that export commission earned by the non-residents for services rendered outside India could not be deemed to be income which had either accrued or arisen in India in terms of section 9( 1 )(i) of the IT 14 Act.
12.10 It is further seen that the Hon'ble Authority for Advance Rulings (AAR), in the case of Spahi Projects P. Limited, 315 ITR 374, after considering the provisions of section 9(1 )(i) of the Act, held that Commission paid to an Agent in South Africa for distribution of the products of the applicant in South Africa was not chargeable to tax in India. On similar facts, the Hon'ble AAR held in the case of Ind Telesoft P. Ltd, in Re, 267 ITR 725, that for payment of Commission thereon to nonresident companies for securing business outside India, there is no liability to deduct tax at source under the Indian Income Tax 1961.
12.11 Similar decisions have been made in the following judgments also :
i. DCIT vs. Angelique International Ltd. [(2013) 55 SOT 226 (Delhi)] "Commission paid to a non-resident agent for services rendered outside India is not chargeable to tax in India and that hence, no disallowance can be made under s. 40(a)(ia).Where the relationship between the assessee and its nonresident agents is on a principal to principal basis, sales commission paid to non- residents for services rendered outside India could not be deemed to be income accrued or arise in India."
ii. ACIT vs. Priyadarshini Spinning Mills (P.) Ltd. [2013] 55 SOT 432 (Hyderabad) "Section 195, read with section 40(a)(i), of the Income-tax Act, 1961 - Deduction of tax at source - Payments to non-resident - Assessment year 1998-99 - Whether where foreign agents were appointed to act as a selling agents of assessee outside India, commission earned by them for services rendered by them outside India could not be considered as income chargeable to tax in India - Held, yes - Whether therefore, when commission paid to non-residents were not chargeable to tax under provisions of Act, no deduction of tax was required to be made under section 195(1) warranting disallowance under section 40(a)(i) - Held, yes"
iii. ITO v. M/s. Faizan Shoes Pvt. Ltd in ITA No. 2095/MDS/2012 dated 23.04.2013 "6. "On going through the order of the Commissioner of Income Tax (Appeals), we find that the non-residents are only procuring orders for the assessee and following up payments, no other services are rendered other than procuring the orders and collecting the amounts. The non-residents are 15 not providing any technical services to the assessee. The commission payment made to non-residents also does not fall under the category of royalty or fee of technical services, therefore the Explanation to sub-section (2) of section 9 has no application to the facts of the assessee's case. We see that this case is squarely covered by the decision of the Supreme Court in the case of GE India Technology Cen. P. Ltd. Vs. CIT (327 ITR 456) wherein the Hon'ble Supreme Court held that the assessee is not liable to deduct TDS when non-residents provided service outside India . It was held that when the services are provided outside India, the commission payments made to nonresidents cannot be treated as income deemed to accrue or arise in India, therefore, the provisions of section 195 has no application. In order to invoke the provisions of section 195 of the Act, the income should be chargeable to tax in India. Here the commission payments to non-residents are not chargeable to tax in India and therefore the provisions of section 195 are not applicable. In the circumstances, we sustain the order of the Commissioner of Income Tax (Appeals) in deleting the disallowance made under 40(a)(i) of the Act."
iv. AIA Engineering Ltd. vs. Addl. CIT (2012) 50 SOT 134 (Ahmedabad) v. ACIT vs. Modern Insulator Ltd. [ (2011) 140 TTJ (Jp) 715 ; 10 ITR (Trib) 147] 12.12 On the basis of the aforesaid decisions, the legal position which emerges is that income earned by a non-resident foreign agent for procuring orders from a source outside India cannot be deemed to be income accruing or arising in India for the purposes of section 9(1 )(i) of the Act. Therefore, I am of the considered opinion that the Commission paid by the Appellant to the Non-Resident Agents for services rendered outside India cannot be deemed to be income which has accrued or arisen in India in terms of section 9(1 )(i) of the Act.
12.13 The Assessing Officer has relied upon the decision of the Delhi Bench of the Hon'ble ITAT in the case of Asia Satellite Telecommunications Company Ltd. vs. DCIT, 85 ITD 478 (Delhi), where it was held that since the payment to non resident agent had been made for Commission which is originating in India due to the Indian goods, the Commission income is attributable to the operations carried in India. In this regard, it is observed that this order of the Hon'ble ITAT has been reversed by the Hon'ble Delhi High Court in the case of Asia Satellite Telecommunications Co. Ltd. Vs. Director of Income Tax, 322 ITR 140 wherein the Hon'ble High Court of Delhi has held that in order for income to 16 be taxable u/s 9(1) (i), the carrying on of operations in India is a sine qua non. As discussed earlier, in the present case, the Commission Agents had no business connection in India, therefore, their income from Commission cannot be deemed to be income accruing or arising in India for the purposes of section 9(1 )(i) of the Act.
12.14 The Assessing Officer has stated in the Assessment Order that there was liability on the Appellant to deduct TDS u/s 195 from the Commission paid to foreign Agents as the Commission income has accrued to such foreign Agents in India. However, it is observed that the Ld. Assessing Officer has failed to rebut the claim of the Appellant that the Commission Agents had no business connection in India. In this connection, no material evidence has been brought on record by the Assessing Officer to show that the Commission Agents had any Permanent Establishment (PE) in India.
12.15 The Ld. Assessing Officer has further stated in the Assessment Order that since CBDT has withdrawn its Circular No. 23 and 786, therefore the Commission remitted to non- resident to foreign Agent become chargeable to tax in India. In this regard it is observed that the circulars issued by the Board were reiterating the position of law and therefore, the withdrawal of circulars does not mean that the position of law has undergone any change. A significant aspect to be considered is the reason as to why the Circulars were withdrawn. Para 2 of the Circular No. 7/2009 dated 22.10.2009 of the CBDT states as under
"2. It is noticed that interpretation of the Circular by some of the taxpayers to claim relief is not an accordance with the provisions of section 9 of the Income-tax Act, 1961 or the intention behind the issuance of the Circular. "
12.16 It is seen that the reason why the Circular No. 23 of 23rd July 1969 was withdrawn was that the interpretation by "some" of the taxpayers to claim relief was not an accordance with Section 9 of the Act or the intention behind the issuance of the Circular. Thus the reason why the Circular No. 23 was withdrawn was that "some" taxpayers were apparently attempting to misuse the Circular to claim relief not in accordance with the Act. The withdrawal of the Circular No. 23 (and also the Circular No. 163 dated 29.05.1975 and Circular No. 786 dated 07.02.2000, which only provided clarification in respect of certain provisions of Circular No. 23) was only to prevent the misuse by "some" taxpayers.
17The withdrawal did not imply that the relief was to be denied to all taxpayers. The withdrawal of the Circular No. 23 alongwith Circular No. 163 and Circular No. 786 only left the field open for the Assessing Officer to establish that the Assessee in question was amongst those "some" taxpayers who were claiming relief not in accordance with the Act. The Ld. Assessing Officer without establishing that the present Assessee was amongst those "some" taxpayers who were claiming relief which was not in accordance with the Act, sought to use the withdrawal of Circular No. 23 alongwith Circular No. 163 and Circular No. 786, as if the relief was to be denied to all taxpayers irrespective of the facts of the case or the genuineness of the relief claimed.
12.17 The withdrawal of the relevant Circular and its effect on the allowability of foreign Commission has been discussed by Hon'ble Bangalore Bench of ITAT in the case of Exotic Fruits Pvt. Ltd. vs. ITO [in ITA 1008 to 1013/Bang./2012, order dated 04-10-2013], according to which even after the withdrawal of the said circulars, Foreign Agent's Commissions paid in the above circumstances do not become income chargeable to tax in India. In this judgment, the Hon'ble ITAT has considered a crucial fact about the withdrawal of circular by the Central Board of Direct Taxes (CBDT) i.e. Circular No. 23 dated 23-07-1969, it was held that TDS was not required to be deducted on the payments of Commission made to Foreign Agents abroad and even after the withdrawal. Relevant Para from the order of the Hon'ble ITAT is reproduced below for ready reference "Para 7.2-.... we have noticed that none of the assessee's agents based abroad have rendered any services in India. Admittedly, none of the assessee's agents have their offices or business establishments in India for rendering such services to the assessee. The commissions to such agents have been paid not in India but overseas. Since no part of the services was rendered by such agents in India, no income arose on the payment of commissions to such agents and, consequently, as rightly argued by the learned AR, the question of deduction of tax at source u/s 195 of the Act doesn't arise."
Para 7.5: "The CBDT vide Circular No.7 of 2009 dtd. 22.10.2009 has withdrawn the Circular No.23/1969 with retrospective effect. In the Circular No.23 of 1969, CBDT clarified that the payment made to non-resident commission agents was not liable to income-tax in India. Such clarification of CBDT was based on the provisions of sections 5. 7. 9.195 and other relevant 18 provisions of the Act. The question for consideration is when there is no relevant change in sections 5, 7. 9, 195 then as to how the withdrawal of Circular No.23 of 1969 of CBDT will make the commission paid to such non-resident commission agents taxable in India. I am of the considered view that even after the withdrawal of Circular No.23 of 1969, the position will remain the same i.e., the commission paid to non-resident agents is not liable to tax under the provisions of I.T. Act when the services were rendered outside India, services were used outside India, payments were made outside India and there was no permanent establishment or business' connection in India. It cannot be accepted that by virtue of CBDT Circular No.23/1969, the commission paid to non-resident agents become not liable to income-tax in India and on such withdrawal of Circular by the CBDT, such commission paid to non-resident agents become liable to income-tax in India. Irrespective of Circular issued by CBDT, the question of taxability of such commission to income tax has to be decided as per the provisions of section 9(1) of the Act. I am of considered view that the provisions of sec. 9(1) are not applicable to the commission paid to such non-resident agents. Such income (commission) in the hands of non-resident commission agents did not accrue or arise directly or indirectly, through or from any business connection in India. Such income to the non-resident commission agents did not accrue or arise in India through or from any property in India or through the transfer of capital asset situated in India. In the facts and circumstances the provisions of sec. 9(1) were not applicable to such payment of commission by appellant to nonresident agents "
Para 7.7-" in the absence of permanent establishment(s) of such agents in India, the incomes of the said agents were NOT liable to be taxed in India and, as such, the assessee was not obliged to effect any deduction of tax on the commission payments made to the agents who were positioned overseas."
12.18 Th e Hon'ble ITAT in the case of Gujarat Reclaim & Rubber Products Ltd. vs. Addl. DIT dated 19 April, 2013 [2013] 35 taxmann.com 587 (Mum) -Trib.] has also considered the issue of withdrawal of circular by the Central Board of Direct Taxes (CBDT) i.e. Circular No. 23 dated 23-07-1969 and even after the withdrawal it was held that TDS was not required to be deducted on the payments of commission made to foreign agents abroad. The relevant Para is reproduced below:-"The CBDT vide Circular No.7 of 2009 dated 22.10.2009 has withdrawn the Circular No.23/1969 with retrospective effect. In the Circular No.23 of 1969, CBDT clarified that the payment made to nonresident commission agents was not liable to income- tax in India. Such clarification of CBDT was based on the provisions of section 5, 7, 9,195 and other relevant provisions of the Act. The question for 19 consideration is when there is no relevant change in sections 5,7, 9, 195 then as to how the withdrawal of Circular No.23 of 1969 of CBDT will make the commission paid to such non-resident commission agents taxable in India. I am of considered view that even after the withdrawal of Circular No.23 of 1969, the position will remain the same i.e. the commission paid to non-resident agents is not liable to tax under the provisions of the I.T. Act when the services were rendered outside India, services were used outside India, payments were made outside India and there was no permanent establishment or business connection in India. It cannot be accepted that by virtue of CBDT Circular No.23/1969, the commission paid to non-resident agents become not liable to income-tax in India and on such withdrawal of Circular by the CBDT, such commission paid to non-resident agents become liable to income-tax in India. Irrespective of Circular issued by CBDT, the question of taxability of such commission to income-tax has to be decided as per the provisions of section 9(1) of the Act. I am of considered view that the provisions of sec. 9(1) are not applicable to the commission paid to such non-resident agents. Such income (commission) in the hands of nonresident commission agents did not accrue or arise directly or indirectly, through or from any business connection in India. Such income to the nonresident commission agents did not accrue or arise in India through or from any property in India or through the transfer of capital asset situated in India. In the facts and circumstances the provisions of sec. 9(1) were not applicable to such payment of commission by appellant to non-resident agents." 12.19 The Assessing Officer has also relied upon the ruling of the Hon'ble AAR in the case of SKF Boilers and Driers P. Ltd., 343 ITR 385 wherein it was ruled that commission paid to agents outside India is deemed to accrue and arise in India under section 5(2)(b) read with section 9(1 )(i) of the IT Act. However, on a careful perusal, it appears that in the aforesaid case, Section 9(1 )(i) was applied without examining the concept of 'business connection'. In this context, the term 'business connection'as defined in Explanation 2 to Section 9(1) would mean:
"any business activity carried out through a person who, acting on behalf of the non-resident
(a) has and habitually exercises in India, an authority to conclude contracts on behalf of the non-resident, unless his activities are limited to the purchase of goods or merchandise for the non-resident; or
(b) has no such authority, but habitually maintains in India a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the non-resident; or
(c) habitually secures orders in India, mainly or wholly for the nonresident or for that non-resident and other non-residents controlling, controlled by, or 20 subject to the same common control, as that nonresident:
Provided that such business connection shall not include any business activity carried out through a broker, general commission agent or any other agent having an independent status, if such broker, general commission agent or any other agent having an independent status is acting in the ordinary course of his business"
12.20 Thus, Section 9(1 )(i) provides that income arising out of 'business connection' is chargeable to tax in India only to the extent of income reasonably attributable to the operations carried out in India. It may be noted that for invoking Section 9(1 )(i), existence of business connection/ Permanent Establishment is & sine qua non and inevitable. It £Tsb appears that in the aforesaid ruling, the earlier ruling of the Hon'ble AAR in the case of Spahi Projects, 315 ITR 374 has not been considered and also the decision of the Hon'ble Supreme Court in the case of CIT vs. Toshuku, 125 ITR 525 has also been not considered, and therefore the case of SKF Boilers and Driers P. Ltd. is to be treated as per incuriam. Therefore, the finding of the AO that right to receive commission arises in India when the order is executed by the person resident in India is not correct since the mere fact that payment is made by a person resident in India or the order is executed by a person resident in India does not result in establishment of business connection of the non-resident payee. It is also observed that the SKF Boilers ruling was decided ex-parte, without any representation from the side of the assessee and, therefore, the binding precedents, it appears, were not noticed/ considered by the AAR. It is further noticed that the ruling of the Hon'ble AAR in SKF Boilers is based on the ruling in the case of Rajiv Malhotra, [(2006) 284 ITR 564 (AAR)]. According to the Ld. Assessing Officer the said decisions lay down that tax deduction was mandatory on export Commission since Commission was deemed to accrue or arise in India. However, it is observed that the facts of the above ruling are entirely different from those of the appellant. In the case of Rajiv Malhotra, the commission was payable to non-resident agent for soliciting foreign participant abroad for a trade exhibition to be held in India. Therefore, in view of specific provisions of s. 5(2) (b) r/w s. 9(1 )(i) as the right to receive the Commission under the terms of the agency agreement had arisen in India, the Commission was held be taxable in India under the provisions of the act. But in the Appellant's case, the facts are entirely different. In this case, the Appellant has paid foreign Commission to Non Residents for Commission due on export orders procured by them, i.e. the Non Residents. These foreign Commission Agents are not resident in India. These agents operate their activities outside India in their own countries i.e. UAE & USA, 21 and no part of their activities arise in India. They were paid Commission which relates to services provided to the Appellant from outside India .The relation between the Appellant and the Agents are principal to principal. These Agents did not have any Permanent Establishment or permanent place of business place in India. The Commission was remitted directly to these Agents directly outside India and not received by them or on their behalf in India by any third party (or by them). Moreover, the Hon'ble AAR in the case of Ind Telesoft P. Ltd. 267 ITR 725 have held that tax was not required to be deducted out of foreign Agent's Commission. In that view of the matter, the decision of the AAR in SKF Boilers cannot be said to be a binding precedent.
12.21 The Hon'ble Delhi High Court has held that in the case of CIT vs. EON TECHNOLOGY (P) LTD. [(2012) 343 ITR 366, as under
"When a non-resident agent operates outside the country no part of his income arises in India, and since payment is remitted directly abroad, and merely because an entry in the books of accounts is made, it does not mean that the non-resident has received any payment in India--Appellate authorities, on the basis of material on record, have rightly held that business connection is not established--Tax was not deductible at source and disallowance under s. 40(a)(i) was not called for."
The judgment of Hon'ble Delhi High Court is subsequent to the judgment in the case of Rajiv Malhotra (AAR). Further the judgment of jurisdictional High Court has binding force.
12.22 As discussed earlier, the reliance of the Assessing Officer upon the ruling of the Hon'ble AAR in the case of SKF Boilers & Driers P. Ltd., 343 ITR 385 is misplaced. It is further seen that the Hon'ble AAR has itself given a subsequent decision in the case of Endemol India Pvt. Ltd. in RE, 361 ITR 361, as per which the income of the Non-Resident was not taxable in India and the payments made by the Indian company i.e. Endemol India Pvt. Ltd. to the Non-Resident Company i.e. Endemol Argentina SA did not require any withholding of tax u/s 195 as the income earned by the Non- Resident (Endemol ARG) was not taxable in India. It was held by the Hon'ble AAR in this case (as per Headnotes) as under:-
"i) That if the services were characterised as "contract work" under section 194C of the Act, the income received should be necessarily treated as business income. The non-resident company did not have a permanent establishment in India. The services were rendered and utilised outside India and the payments for the services rendered were also received outside India.22
There was no business connection in India. In such circumstances the income of the non-resident company was not taxable in India.
(iii) That the transaction would not be subjected to withholding of tax under section 195 of the Act."
12.23 The final and operative part of the order of the Hon'ble AAR in the case of Endemol India Pvt. Ltd. in RE, 361 ITR 361 is as under:-
"Again, if the services are characterised as "contract work" under sec-tion 194C of the Act, then the income received should be necessarily treated as business income. The non-resident company does not have permanent establishment in India. The services are rendered and utilised outside India and the payments for the services rendered is also received outside India.
There is no business connection in India. In such circum-stances, the income of the non-resident company is not taxable in India.
The questions raised by the applicant are answered as follows :
(1) The payments made by the applicant towards line production services provided by Endemol ARG in accordance with the agreement entered into by the applicant with Endemol ARG is not "fees for technical services" as the services falls under "work contract" as defined in the Explanation to section 194C of the Income-tax Act.
(2) The question is not dealt with because of our answer to question No. 1.
(3) The payments made by the applicant to Endemol ARG for availing of the line production services under the agreement is not chargeable to tax as per the provisions of section 9(1 )(i) of the Income-tax Act.
(4) The receipts by Endemol ARG from the applicant will not suffer withholding of tax under section 195 of the Act as the income earned is not taxable in India.
The ruling is given and pronounced accordingly on this 13th day of December, 2013."
12.24 It was held by the Hon'ble ITAT, Delhi in the case of Adidas Sourcing Ltd. vs. ADIT, 21 ITR (Trib) 697, distinguishing the commission received by the Non-Resident from technical services. The Hon'ble ITAT 23 explained the ambit, scope and meaning of the terms managerial, technical and consultancy services and classified the amounts received as Commission, as against Fees for Technical Services. It was held by the Hon'ble ITAT (as per Headnotes) as under:-
"It is evident that for a particular stream of income to be characterised as "fees for technical services", it is necessary that some sort of "managerial", "technical" or "consultancy" services should have been rendered in consideration. The terms "managerial", "technical" or "consultancy" do not find a definition in the Income-tax Act, 1961 and it is a settled law that they need to be inter-preted based on their understanding in common parlance. Management in organisations include at least the following : (a) discovering, developing, defining and evaluating the goals of the organisation and the alternative policies that will lead towards the goals ; (b) getting the organisation to adopt the policies ; (c) scrutinising the effectiveness of the policies that are adopted and (d) initiating steps to change policies when they are judged to be less effective than they ought to be. Management thus pervades all organisations. The popular meaning associated with the word "technical" is "involving or concerning applied and industrial science". Not all kinds of advisory services could qualify as technical services. For any consultancy to be treated as a technical services, it would be necessary that a technical element is involved in such advisory. Thus, the consultancy should be rendered by someone who has special skills and expertise in rendering such advisory. Circulars 23 of 1969 and 786 of 2000 ([2000] 241 ITR (St.) 132) were issued in the context of sales commission payable by a resident exporter to the agents outside India and reiterated that the income paid to an agent is not taxable if the operations are carried out by the agent outside India. Further, it may be noted that the nature of operations undertaken by a sales agent is similar to those under-taken by a buying agent and, therefore, if the income of a sales agent cannot be taxed in India the income of buying agent also cannot be taxed in India.
J. K. (Bombay) Ltd. v. CBDT [1979] 118 ITR 312 (Delhi) and SkyceW Communications Ltd. v. Deputy CIT [2001] 251 ITR 53 (Mad) applied.
The assessee was a tax resident of Hong Kong. Its sourcing division provided buying agency services to various customers including an Indian company, an associate enterprise. For such services the assessee entered into a "buying agency services agreement" with the Indian company for sourcing of merchandise in respect to which the assessee received buying commission at 24 8.25 per cent, of the value of merchandise. The assessee provided services which included centralised media and advertisement planning, market research, public relations, sports marketing and other marketing services such as catalogue production, development of retail shop systems, etc. Another division of the assessee's group, provided certain regional marketing and administrative support services to the group's Asia-Pacific distribution entities (including the Indian company). Under the buying agency services agreement, during the assessment year 2007-08 the assessee was required to provide services to the Indian company in relation to purchase of goods from outside India, for and on behalf of the Indian company in accordance with the terms of the agreement. For the year under consideration, the assessee received remuneration in the form of buying commission at 8.25 per cent, of the invoice amount of the merchandise. The total commission earned by the assessee during the year under consideration was Rs. 1.13 crores. According to the agreement, the assessee was broadly required to provide the following services to the Indian company in relation to the sourcing of goods from outside India : (i) maintain relationship with the manufacturers outside India and search for new potential manufacturers ; (ii) supply to the Indian com-pany credit reports and other marketing information concerning manufacturers ; (iii) co-ordinate between the Indian company and manufacturers for the purpose of buying the merchandise including placing the purchase order, assisting in negotiations, etc. ; (iv) assist in procurement of samples and sending the same to the Indian company with other terms and conditions for approval ; and (v) provide translation services as required for communication between the Indian company and the manufacturers. For the year under consideration, the assessee received buying commission from the Indian company for the services provided by the assessee to the Indian company. Such buying commission was not offered to tax by the assessee in the return of income. During the course of the assessment proceedings, the Assessing Officer held that the buying commission income received by the assessee was in the nature of fees for technical services and should be taxable in India in the hands of the assessee. Accordingly, it considered to be taxable on gross basis at 30 per cent, on the ground that the agreement for providing such services was entered into on June 18, 1999. The Dispute Resolution Panel confirmed the view of the Assessing Officer. On appeal to the Tribunal:
_Held,_ that the assessee was to receive commission for procuring the products for the Indian company and rendering incidental services for purchases. The services rendered by the assessee in this case were purely in the nature of procurement services and could not be characterised as 25 "managerial", "technical" or "consultancy" services. Accordingly, the consideration received by the assessee was appropriately classified as "commission" as against "fees for technical services". It was not taxable in India."
12.25 It has been held by the Hon'ble ITAT Mumbai in the case of Armayesh Global vs. ACIT 45 SOT 69 as under:-
"The overseas agent did not render any services in India. It had no place or permanent establishment in India. It worked abroad and procured orders. The orders were sent directly by the foreign purchasers remitted to the assessee in India and even the payment for export was received by the assessee in foreign currency directly from foreign purchasers and the commission was paid to foreign agent thereafter as a percentage of sales in terms of the agency agreement. The payment made to overseas commission agent by the assessee was not for technical/managerial services. Therefore, in the absence of any service having been rendered in India, no part of the commission paid to the overseas agent could be said to be chargeable in India and in the absence of any income chargeable to tax in India, question of applying section 195 did not arise."
12.26 It has been held by the Hon'ble Allahabad High Court in the order dated 17.12.2013 in the case of CIT vs. Model Exims, ITA No. 361/ 2013, as under :-
"We find that all the questions as framed by the Department are covered by our judgment in CIT v. Model Exims (Income Tax Appeal (Def.) No. 164 of 2011, decided in favour of the assessee and against the Revenue on September 10, 2013-since reported in [2013] 358 ITR 72 (All)) and the judgment in CIT v. Allied Exims (Income Tax Appeal No. 313 of 2013 decided on November 13, 2013 since reported in [2014] 363 ITR 62 (All)). In both these judgments we have held that the Assessing Officer did not bring anything on record, which could demonstrate that non-resident agents were appointed as selling agents, designers or technical advisers. The payment of commission to the foreign agents did not entitle such foreign agents to pay tax in India and, thus, the TDS was not liable to be deducted under section 195 of the Act. The disallowance made by the Assessing Officer under section 40(a)(i) for non-deduction of tax at source under section 195 were not justified."
12.27 It was further held by the Hon'ble Allahabad High Court in the case of Model Exims (supra) as under :-
26"We do not find that the fact situation contemplated or clarified in the Explanation added by the Finance Act, 2010, is applicable to the present case as, in the present case, the agents appointed by the assessee had their offices situate in a foreign country and that they did not provide any managerial services to the assessee. Section 9(1)(vii) deals with technical ser-vices and has to be read in that context. The agreement of procuring orders would not involve any managerial services. The agreement did not show the applicability or requirement of any technical expertise as functioning as selling agent, designer or any other technical services.
There are no distinguishing feature in this case, nor do we find that the ratio of the Constitution Bench decision in Commissioner of Central Excise v. Ratan Melting and Wire Industries [2008] 11 RC 653 ; [2008] 231 ELT 22 (SC) is applicable inasmuch as in the present case there was no decision of the Supreme Court or the High Court or any statutory provision, which was contrary to the circular, which was withdrawn on October 22,2009.
The questions of law are covered by the judgments of this court cited as above, and are decided in favour of the assessee and against the Department."
12.28 It is also noted that there is no requirement for the agreements with the Agents to be in writing as held by Delhi Bench of Hon'ble Income Tax Appellate Tribunal in the case of DCIT vs. Angelique International Limited [(2013) 55 SOT 226 (Delhi)]. However, the letter for appointment of the Agents dated 6.3.05 and 25.4.07 of the two Agents i.e. A1 Mehtab Trading Co. Ltd., Dubai, UAE and Global Purchasing Inc., New Jersey, USA were filed before the Assessing Officer and it was stated by the Appellant that these letters constituted the final contracts duly evidence by the conduct of the parties. It was also claimed that similar payments were made in the earlier years which were allowed and that following the principle of consistency, the payments made towards Commission to Non-Residents should be allowed in this year also. Though merely because disallowance was not made in earlier years, the Assessee cannot claim that no disallowance be made, as each year is separate, and there is no res judicata in taxation proceedings as discussed above in Para 9.16 to 9.19, but even for the instant year there is nothing to show that disallowance should be made. 12.29 In any case, the provisions of the Act are overridden by the provisions of the DTAA between India and the country of residence of the non-resident, to the extent more beneficial to the non-resident assessee, 27 vide section 90(2) of the Act, which reads as under:-
"Where the Central Government has entered into an Agreement with the Government of any country outside India under sub section (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to the assessee."
12.30 In terms of Article 7(1) of the Double Taxation Avoidance Agreement ('DTAA') between India and UAE the business profits of the enterprises situated in UAE can be taxed in India only if those enterprises carry on business in India through a Permanent Establishment ('PE') situated in India. Article 7(1) of the DTAA between India and UAE is reproduced hereunder "Article 7 - Business profits -1. The profits of an enterprise of a Contracting state shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment"
12.31 Similarly, as per Article 7(1) of the Double Taxation Avoidance Agreement between India and USA, the Business profits of the enterprises of USA can be taxed India only if those enterprises carry on business in India through a Permanent Establishment (PE) situated in India. Article 7(1) of the DTAA between India and USA is reproduced hereunder :-
"Article 7 BUSINESS PROFITS 1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to (§)4fiat permanent establishment; (b^sales in the other State of goods or 28 merchandise of the same or similar kind as those sold through that permanent establishment; or Jp) other business activities carried on in the other State of the same or similar kind as those effected through that permanent establishment."
12.32 Thus the existence of Permanent Establishment (PE) in India is sine qua non for bringing to tax business income of those entities in India. In other words, even if a UAE or a USA resident is held to have a 'business connection' in India, its business income will not be taxable in India in the absence of PE of such enterprise in India.
12.33 In the present case, it is observed that the Commission agents did not have any Permanent Establishment in India. It is not the case of the Ld. Assessing Officer that the Non Resident Agents had a Permanent Establishment in India or that the activities of the Agents were such that it could be deemed that there a Permanent Establishment (PE) in India. Hence, the Commission paid by the Appellant to the foreign resident would not be taxable in India as business income since that resident does not have PE in India.
12.34 On the basis of the above discussion, I am of the considered opinion that Commission payment to non-resident Commission Agents for export of Manufactured Stainless Steel Utensils etc. does not represent income which is chargeable to tax under section 195 of the I.T act 1961 when analyzed under the framework of provisions of the Indian I.T Act or under the Indo USA and under the Indo UAE Double Taxation Avoidance Agreements. Hence, Tax Deduction at Source was not required for said Commission payments to non-resident Agents and thus the expenses could not be disallowed u/s 40(a)(ia) of the Income Tax Act, 1961.Accordingly, the addition of Rs.47,77,826/- is hereby deleted.
(Deleted:Rs.47,77,826/-)"
22. The Ld. DR could not show that how the above income is chargeable to tax in India and tax is required to be deducted at source thereon under provision 195 of the Act. In view of above facts we find no infirmity in the 29 order of the CIT (A) who has also giving relief to the assessee correctly . In the result ground No. 2 of the appeal of the revenue is dismissed.
23. In the result appeal filed by the revenue is dismissed.
Order pronounced in the open court on 09.04.2018.
Sd/- Sd/-
(JOGINDER SINGH) (PRASHANT MAHARISHI)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated: 09.04.2018.
*Neha*
Copy forwarded to
1. Applicant
2. Respondent
3. CIT
4. CIT (A)
5. DR:ITAT
ASSISTANT REGISTRAR
ITAT, New Delhi
30
1. Draft dictated on 06.04.2018 PS
2. Draft placed before 06.04.2018 PS
author
3. Draft proposed & placed JM/AM
before the second
member
4. Draft discussed/approved JM/AM
by Second Member.
5. Approved Draft comes to PS/PS
the Sr.PS/PS
6. Kept for pronouncement PS
on
7. File sent to the Bench PS
Clerk
8. Date on which file goes to
the AR
9. Date on which file goes to
the Head Clerk.
10. Date of dispatch of
Order.
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