Income Tax Appellate Tribunal - Delhi
Eon Technology (P) Ltd.,, New Delhi vs Department Of Income Tax on 20 March, 2006
IN THE INCOME TAX APPELLATE TRIBUNAL
(DELHI BENCH "B" DELHI)
BEFORE SHRI A.D. JAIN AND SHRI K.D. RANJAN
ITA NO. 5692(Del)2010
Assessment year: 2007-08
Dy.Commissioner of Income Tax, M/s. Eon Technology (P)Ltd.,
Circle 11(1), New Delhi. V. 63, Surya Niketan, N. Delhi.
(Appellant) (Respondent)
Appellant by: Shri B. Kishore, Sr. DR
Respondent by: Shri Gautam Jain, CA
ORDER
PER A.D. JAIN, J.M.
This is Department's appeal for assessment year 2007-08, contending that the learned CIT(A) has erred in deleting the disallowance of ` 33,36,068/- made by the AO u/s 40(a)(i) of the Income Tax Act.
2. The assessee company is in the business of development and export of software. During the year, it claimed deduction of ` 33,36,068/- representing commission paid to M/s. EON Technologies,U.K. ("ETUK" for short), under an agreement dated 20.3.2006. The deduction was disallowed u/s 40(a)(i) of the Act. The AO observed that the assessee had paid the commission to ETUK, under the agreement, on the sales and amounts 2 ITA No.5692(Del)2010 realized against exports on contracts won by ETUK for the assessee. The contract was found to have been entered into since the assessee was not in a position to interact and set up a sales and marketing support management operations, for which, ETUK was to invest in and operate the sales and marketing operations from the U.K. The AO was, however, of the opinion that the commission payment ought to have been subjected to TDS. This having not been done, the AO made disallowance u/s 40(a)(i) of the Act. While doing so, the AO observed that ETUK being the sole selling and marketing agent for the assessee, it was rendering the services of the sale agent, thereby enabling it to earn the right to receive the income from the assessee; that since the situs or origin of the receipt was in India, the income was liable to tax in India; that the right to receive the income in India and , therefore, the place of accrual of income, was in India; that it was a corresponding liability of the payer, i.e., the assessee, to make the payment of the amount at the place of accrual of the income, i.e., India; that the source of income arisen to ETUK was its business connection with the assessee company in India and so, there was no force in the assessee's stand that the income accruing or arising abroad through any business connection in India cannot be deemed to accrue or arise in India since no business operation was carried out in the taxable territory of India; that 'receipt and 3 ITA No.5692(Del)2010 'right to receive' being two different non interchangeable concepts, there was also no merit in the assessee's contention that the commission payment, having been remitted directly to ETUK in the UK, the same was not received in India; and that since ETUK had a business connection in India, it had earned the right to receive the income in India and such income was thus deemed to accrue or arise in India.
3. By virtue of the impugned order, the ld. CIT(A) deleted the disallowance made by the AO.
4. Aggrieved, the Department is in appeal.
5. Challenging the impugned order, the ld. DR has contended that the ld. CIT(A) has erred in deleting the addition rightly made by the AO u/s 40(a)(i) of the Act; that the ld. CIT(A) has gone wrong in relying on the decision dated 9.9.2010, of the Hon'ble Supreme Court in the case of "GE India Technology Centre (P) Ltd. v. CIT" (copy placed on record by the assessee, at pages 29 to 33 of its paper book); that the matter stands decided in favour of the Department by the Hon'ble Supreme Court in "Transmission Corporation of Andhra Pradesh Ltd. v. CIT", 239 ITR 587(SC); that "Transmission Corporation of Andhra Pradesh Ltd. "(supra), does not stand over-ruled by "GE India Technology Centre (P)Ltd." (supra); that as held in "Transmission Corporation of Andhra Pradesh Ltd. "(supra), where the 4 ITA No.5692(Del)2010 assessee disputes liability to deduct TDS, it is incumbent for the assessee to file an application in this regard before the AO for determination of sum chargeable to tax; that this was not done in the present case; that, therefore, in accordance with "Transmission Corporation of Andhra Pradesh Ltd.
"(supra), the disallowance u/s 40(a)(i) of the Act, as ordered by the AO, was entirely called for; and that as such, the order passed by the ld. CIT(A) being erroneous, the same be cancelled and that passed by the AO be ordered to be revived by allowing the Department's appeal.
6. On the contrary, the learned counsel for the assessee has strongly defended the order under appeal. It has been contended, as before the authorities below, that there was no business connection between the assessee and ETUK in India and so, ETUK did not acquire any right to receive income earned in India; that it has not been disproved by the AO that ETUK rendered services to the assessee company outside India; that undeniably, the assessee company stands incorporated in India and it had its operations in India during the year ; that there is nothing on record that ETUK had rendered services in India; that the contract between the assessee company and ETUK was itself entered into, since the assessee was not in a position to interact and set up sales and marketing support management operations in the assessee's clients' locations, for which it was, that ETUK 5 ITA No.5692(Del)2010 was to invest in and operate the sales and marketing operations from the UK; that this fact stands noted in the assessment order itself; that the commission paid does not constitute or give rise to any income chargeable in India, either under the Indian Income Tax Act or under the provisions of the Indo-UK DTAA; that as such, no tax was deductible regarding the commission paid u/s 195 of the I.T. Act; that that being so, no disallowance ought to have been made u/s 40(a)(i) of the Act; that otherwise too, according to the CBDT Circular No. 786 dated 7.2.2000 (241 ITR 132 Statute) and CBDT Circular No. 23 dated 23.7.69, commission paid to non-resident Indians for the services rendered outside India are not chargeable to tax in India; that undoubtedly, CBDT Circulars are binding on the Department; that ETUK having no operations in India, the commission earned by ETUK cannot be held to be attributable, either directly or indirectly, to any operations carried on in India; that the AO brought nothing on record to show otherwise; that as such, the AO erred in holding that there was a business connection between the assessee and ETUK in India, which alleged business connection could have provided ETUK with the right to receive the income in India; that there exists a principle to principle relationship between the assessee and ETUK, due to which, ETUK has an independent status; that, therefore, there does not exist any business connection of ETUK which could have 6 ITA No.5692(Del)2010 resulted any earning of income outside India; that hence, no foreign income can be deemed to accrue or arise in India; that further, ETUK is not shown to have any permanent establishment in India and so, income derived from business outside India is not assessable in India; that the ld. CIT(A) has rightly relied on "GE India Technology Centre (P)Ltd." (supra); that in "GE India Technology Centre (P)Ltd." (supra), it has been held that section 195(1) of the Act talks of income chargeable under the provisions of the Act and says that 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 Income Tax Act; that therefore, in accordance with "GE India Technology Centre (P)Ltd." (supra), chargeability to tax, of the sum paid, under the provisions of the Act, is a statutory pre-condition for invoking section 195(1) of the Act; that it was on this basis that the ld. CIT(A) held that the commission paid by the assessee to ETUK, a non-resident, who had rendered services outside India, was a sum not chargeable to tax in India; that the ld. CIT(A) has also rightly placed reliance on "CIT v. Toshoku Limited", 125 ITR 525(SC), wherein it has been held that 'business connection' presupposes that the non-resident carries on business in India; that in the present case, since no business was carried out in India by the non-resident, i.e., ETUK, it had no 'business connection'; and that in these facts, the order of the ld. 7 ITA No.5692(Del)2010 CIT(A), being an elaborate well reasoned order, is entitled to be upheld by dismissing the Department's appeal, which does not carry any merit whatsoever.
7. We have heard the parties and have perused the material on record. The facts are not in dispute. The only issue is as to whether the ld. CIT(A) has correctly deleted the disallowance made by the AO regarding the commission paid by the assessee to ETUK without making TDS.
8. As per the contract agreement between the assessee and ETUK, since the assessee was not in a position to interact and set up a sales and marketing support management operations in the clients' locations, ETUK was to invest and operate the sales and marketing operations from UK. Thus, ETUK rendered services to the assessee company outside India. That being so, it cannot be said that there was any right to receive income earned in India, or that there was any business connection between the assessee and ETUK. The AO did not bring anything on record to show that any service was performed by ETUK in India. Pertinently, the CBDT Circulars considered by the ld. CIT(A) are to the effect that commission paid to non- residents for services rendered outside India are not chargeable to tax in India. The Circulars are binding on the Department.
8 ITA No.5692(Del)2010
9. Apropos "Transmission Corporation of Andhra Pradesh Ltd. "(supra), therein, it has been held that the provisions of section 195(1) of the Act are for tentative deduction of income tax on the sum chargeable; that the only thing required is to file an application for determination by the AO that such sum would not be chargeable to tax in the case of the recipient, or for determination of the appropriate proportion of such sum so chargeable, or for grant of a certificate authorizing the recipient to receive the amount without deduction of tax, or deduction of income tax at any lower rate; that on such determination, tax of the appropriate rate could be deducted at source; and that 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 the payment.
10. It is on the above observations of the Hon'ble Supreme Court in "Transmission Corporation of Andhra Pradesh Ltd. "(supra), that the Department seeks to lay much stress. However, it appears that the Department has missed the fact that these observations of the Hon'ble Supreme Court are based on the observations succeeding their Lordships' other observations to the effect that, and we reproduce hereunder, the relevant portion thereof:-
9 ITA No.5692(Del)2010
"..................the Scheme of sub-sections(1)(2) and (3) of section 195 and section 197 leaves no doubt that the expression "any other sums chargeable under the provisions of this Act" would mean 'sum' on which income tax is leviable. In other words, the said sum is chargeable to tax and could be assessed to tax under the Act. The consideration would be whether payment of the sum to the non- resident is chargeable to tax under the provisions of the Act or not............... The purpose of sub-section (1) of section 195 is to see that on the sum which is chargeable u/s 4 of the Act, for levy and collection of income tax, the payer should deduct income tax thereon at the rates in force, if the amount is to be paid to a non- resident..........."
11. It is thus seen that according to "Transmission Corporation of Andhra Pradesh Ltd. "(supra), in the first place, section 195(1) talks of sum chargeable under the provisions of the Act. The Lordships have laid down that as per section 195(1), the payer should deduct income tax on the sum which is chargeable u/s 4 of the Act. TDS is to be made on 'such sum', i.e., the sum chargeable u/s 4 of the Act. The application required to be filed before the AO is for determination as to whether 'the whole of such sum' would not be chargeable to tax in the case of the recipient. As per "Transmission Corporation of Andhra Pradesh Ltd. "(supra), if no such application is filed, TDS is to be made on "such sum".
12. Therefore, the pre-requisite is the chargeability of the sum u/s 4 of the Act. If the sum is, at the outset, not chargeable to tax, there is obviously no question of making TDS thereon. In the words of "Transmission 10 ITA No.5692(Del)2010 Corporation of Andhra Pradesh Ltd. "(supra), "if the sum that is to be paid to the non-resident is chargeable to tax, tax is required to be deducted."
13. Section 4(1) of the I.T. Act lays down that where any Central Act enacts that income tax shall be charged for any assessment year at any rate or rates, income tax at that rate or those rates shall be charged for that year in accordance with and subject to the provisions of the I.T. Act.
14. As per section 40(a)(i) of the Act, any sum chargeable under the I.T. Act, which is payable outside India, on which tax is deductible at source and such tax has not been deducted, is not to be deducted in computing the income chargeable as profits and gains of business or profession.
15. As per section 5 of the Act, the total income of any previous year of a person who is a resident of India includes all income from whatsoever source derived which, inter alia, - (a) is received or deemed to be received in India, or (b) accrues or arises or is deemed to be accrued or arose in India.
16. As per section 9 (1)(i), all income accruing or arising, whether directly or indirectly, inter alia, through or from any business connection in India, shall be deemed to accrue or arise in India.
17. The AO held, as discussed hereinabove, that ETUK had a business connection in India and it was through this business connection that the income accrued or arose in India. However, again, as discussed, no such 11 ITA No.5692(Del)2010 business connection exists, much less is established. The operations carried out by ETUK were not carried out in India. ETUK does not have any permanent establishment in India. ETUK was acting as the assessee's marketing agent and was providing marketing and sales support to all purchases executed by the assessee company for its overseas clients. It was for the rendering of this service that the commission was paid by the assessee to ETUK. The payment was remitted outside India.
18. Therefore, the provisions of section 9(1)(i) of the Act are not fulfilled and there is no deemed accrual of income in India. So, there is no income which could be said to be includible in the total income of ETUK, u/s 5(1) of the Act and, therefore, there is no case for charging income tax in respect of the commission payment made by the assessee to ETUK, under section 4(1) of the Act.
19. Now, when the charging section itself, i.e., section 4(1) does not come into operation, there is no question of the provisions of section 195, in turn, being set in motion as, in section 195(1), to reiterate the observations in "Transmission Corporation of Andhra Pradesh Ltd. "(supra), the words used are "any other sum chargeable under the provisions of this Act", which, in the words of their Lordships, 'would mean "sum" on which income tax is leviable'. It is this which leads us to the next step, i.e., once TDS is not to 12 ITA No.5692(Del)2010 be made on the commission paid, there is no question of disallowance u/s 40(a)(i) of the Act.
20. The contention of the Department is that in the absence of filing an application for determination by the AO that such sum would not be chargeable to tax in the case of the recipient, the payer cannot be permitted to contend that the payment made to the non-resident did not give rise to income chargeable in India and that, therefore, there was no need to deduct TDS. It is this the very contention which has been considered by the Hon'ble Supreme Court in "GE India Technology Centre (P)Ltd." (supra). It was held therein, inter alia, that a person paying the sum to a non-resident is not liable to deduct tax, if such sum is not liable to tax under the I.T. Act. It was noted that in "CIT v. Cooper Engg.", 68 ITR 457(SC), it was pointed out that if the payment made by the resident to the non-resident was an amount which was not liable to tax in India, then no tax is deductible at source, even though the assessee had not made any application u/s 195(2) of the I.T. Act [ then section 18(3B)] of the I.T. Act. It was observed that the application of section 195(2) presupposes 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 the person is not sure as to what should be the portion so taxable, or is not sure 13 ITA No.5692(Del)2010 as to the amount of tax to be deducted; that it is in such a situation that the person is required to make an application to the ITO, TDS, for determining the amount; that it is only when these conditions are satisfied and application is made to the ITO, TDS that the question of making an order u/s 195(2) will arise; that 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; that hence, apart from section 9(1), sections 4,5, 9, 90 and 91, as well as the provisions of the DTAA are also relevant while applying the provisions concerning tax deduction at source; that reference to the ITO, TDS u/s 195(2) or section 195(3) either by the non-resident, or by the resident payer is to avoid any future hassles for both the resident as well as the non-resident; that sections 195(2) and 195(3) are safeguards; that these provisions are of practicable importance; and that as such, where a person responsible for deduction is fairly certain, then he can make his own determination as to whether the tax is deductible at source and, if so, what should be the amount thereof. It was observed that if the contention of the Department that the moment there is remittance, the obligation to deduct TDS arises, is to be accepted, the words "chargeable under the provisions of the Act" in section 195(1) get obliterated. It was lastly observed that the 14 ITA No.5692(Del)2010 payer is bound to deduct tax at source only if the amount is assessable in India and if the tax is not so assessable, there is no question of making TDS.
21. It would not be inappropriate to reproduce the above observations of Their Lordships of the Hon'ble Supreme Court in their own words:-
"7. Under section 195(1), the tax has to be deducted at source from interest(other than interest on securities) or any other sum(not being 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 15 ITA No.5692(Del)2010 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 v. 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 sec. 18(3B) (now section 195(2) of the I.T. Act). The application of section 195(2) 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 f 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 v. 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 16 ITA No.5692(Del)2010 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:
8. If the contention of the Department that the moment there is remittance the obligation to deduct TAS arises is to be accepted then we are obliterating the words "chargeable under the provisions of the Act" in section 195(1). The said expression in section 195(1) shows that the remittance has got to be of a trading receipt, the whole or part of which is liable to tax in India. The payer is bound to deduct TAS only if the tax is assessable in India. If tax is not so assessable, there is no question of TAS being deducted. (See: Vijay Ship Breaking Corporation and Others v. CIT, 314 ITR 309). (Emphasis supplied).
22. It is thus seen that in "GE India Technology Centre (P)Ltd." (supra), the reasoning has been based on "Transmission Corporation of Andhra Pradesh Ltd. "(supra). "Transmission Corporation of Andhra Pradesh Ltd.
"(supra), has thus been followed in "GE India Technology Centre (P)Ltd."
(supra), as rightly contended by the learned counsel for the assessee.
23. We may also note that in "Transmission Corporation of Andhra Pradesh Ltd. "(supra), the observation made, amongst others, is that :- 17 ITA No.5692(Del)2010
"The only thing which is required to be done is to file an application for determination by the AO that such sum would not be chargeable to tax in the case of the recipient.................." (Emphasis supplied).
24. Now this application is not an application for getting declared as to whether a sum is chargeable to tax or not. As the underlined portion makes clear, it is an application for getting determined the issue as to whether the sum would not be chargeable to tax in the case of the recipient of the sum.
25. Further, if, as contended, an application was obligatory to be filed before the ITO (TDS), it would amount to asking the ITO (TDS) to decide the assessability as income of all the sums paid and received, which would obviously not be in consonance with the provisions of section 195 of the Act, as explained in "GE India Technology Centre (P)Ltd." (supra).
26. Therefore, the contention on behalf of the Department is based on a misreading of "Transmission Corporation of Andhra Pradesh Ltd. "(supra), and in ignorance of "GE India Technology Centre (P)Ltd." (supra). As observed, "GE India Technology Centre (P)Ltd." (supra), in effect, follows "Transmission Corporation of Andhra Pradesh Ltd. "(supra).
27. The learned CIT(A) has correctly referred to CBDT Circular No. 23 dated 23.7.1969. Therein, it has been observed that where a foreign agent of an Indian exporter operates in his own country and his commission is directly remitted to him, such commission is not received by him or on his 18 ITA No.5692(Del)2010 behalf in India and that such agent is not liable to income tax in India on the commission received by him.
28. In CBDT Circular No. 786 dated 7.2.2000, reported in 241 ITR 132(Statute), the above clarification given in CBDT Circular No. 23 dated 23.7.1969 has been stated to still prevail, since sections 5(2) and (9) of the Act have not undergone any change, and it states that no tax is, as such, deductible u/s 195 from export commission and other related charges payable to a non-resident agent operating outside India for the services rendered outside India.
This Circular has also been rightly relied on by the ld. CIT(A). Nothing to the contrary has been argued on behalf of the Department. It goes without saying that CBDT Circulars are binding on the Taxing Authorities.
29. The learned CIT(A) has also correctly placed reliance on "CIT v. Toshoku Limited"(supra). Therein, it was observed that the expression "business connection" pre-supposes that the business is carried on in India by the non-resident. The commission amounts earned by the non-resident for the services rendered outside India were held incapable of being deemed to be income accrued or arisen in India. In the present case also, the 19 ITA No.5692(Del)2010 commission amount has been earned by ETUK, undisputedly, for the services rendered in the UK and not in India.
30. In view of the above, finding no error whatsoever in the order of the ld. CIT(A), the same is hereby confirmed. The grievance sought to be raised by the Department is found to be de void of force and is rejected as such.
31. In the result, the appeal filed by the Department is dismissed.
Order pronounced in the open court on 28.02.2011.
Sd/- sd/-
(K.D. Ranjan) (A.D. Jain)
Accountant Member Judicial Member
Dated: 28.02.2011
*RM
copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR
True copy
By order
Deputy Registrar