IT/ILT : Where assessee, engaged in business of manufacture and export of shoes, made payments to non-residents for procuring export orders, said payment not being in nature of fee for technical services or royalty, were not taxable in India and, thus, assessee was not required to deduct tax at source while making said payments
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[2013] 34 taxmann.com 79 (Chennai - Trib.)
IN THE ITAT CHENNAI BENCH 'D'
Income-tax Officer, Co. Ward-II(1)
v.
Faizan Shoes (P.) Ltd.*
ABRAHAM P. GEORGE, ACCOUNTANT MEMBER
AND CHALLA NAGENDRA PRASAD, JUDICIAL MEMBER
AND CHALLA NAGENDRA PRASAD, JUDICIAL MEMBER
IT APPEAL NO. 2095 (MDS.) OF 2012
[ASSESSMENT YEAR 2009-10]
[ASSESSMENT YEAR 2009-10]
APRIL 23, 2013
Section 9, read with section 195, of the Income-tax Act, 1961 - Income - Deemed to accrue or arise in India [Fees for technical services] - Assessment year 2009-10 - Assessee company was engaged in business of manufacture and export of shoe uppers and leather shoes - It paid certain commission to non-residents for procuring export orders - Since assessee did not deduct tax at source while making said payments, Assessing Officer disallowed same under section 40(a)(i) - It was noted from records that non-residents were only procuring orders for assessee and following up payments and apart from that no other services were being rendered - Whether since non-residents were not providing any technical services to assessee, payments made to them did not fall under category of royalty or fee for technical services under section 9(1)(vi) - Held, yes - Whether even otherwise, since commission paid to non-residents was not taxable in India, assessee was not required to deduct tax at source while making said payments - Held, yes - Whether in view of above, impugned disallowance was to be deleted - Held, yes [Paras 6 and 7] [In favour of assessee]
FACTS
| ■ | The assessee-company was engaged in the business of manufacture and export of shoe uppers and leather shoes. | |
| ■ | It paid certain commission to non-residents for procuring the export orders. The assessee claimed that non-residents did not provide any technical services to the assessee except procuring orders and following up of the payments and non-residents had no permanent establishment in India. All orders were procured from outside India and services were rendered outside India. In such circumstances, the commission payments made to non-residents were not taxable in India and, hence, no TDS was required to be deducted under section 195. | |
| ■ | The Assessing Officer rejected the assessee's explanation. He took a view that payments made by assessee were deemed income in hands of non-residents within meaning of section 9(1)(vii). | |
| ■ | According to Assessing Officer, since assessee did not deduct tax at source under section 195 while making payments of commission, said payments were to be disallowed under section 40(a)(i). | |
| ■ | The Commissioner (Appeals), however, set aside disallowance made by Assessing Officer. | |
| ■ | On revenue's appeal: |
HELD
| ■ | It was noted from records that the non-residents were only procuring orders for the assessee and following up payments and apart from that no other services were being rendered. The non-residents were not providing any technical services to the assessee. The commission payment made to non-residents did not fall under the category of royalty or fee for technical services, therefore, the Explanation to sub-section (2) of section 9 has no application to the facts of the assessee's case. | |
| ■ | In order to invoke the provisions of section 195, the income should be chargeable to tax in India. Here the commission payments to non-residents were not chargeable to tax in India and therefore the provisions of section 195 were not applicable. | |
| ■ | In the circumstances, the order of the Commissioner (Appeals) deleting the disallowance made under section 40(a)(i) was justified. [Para 6] | |
| ■ | In the result, the appeal of the revenue was to be dismissed. [Para 7] |
CASE REVIEW
GE India Technology Cen. (P.) Ltd. v. CIT [2010] 327 ITR 456/193 Taxman 234/7 taxmann.com 18 (SC) (para 6) followed.
CASES REFERRED TO
Transmission Corpn. of Andra Pradesh Ltd. v. CIT [1999] 239 ITR 587/105 Taxman 742 (SC) (para 2) and GE. India Technology Cen. (P.) Ltd. v. CIT [2010] 327 ITR 456/193 Taxman 234/7 taxmann.com 18 (SC) (para 6).
Mrs. Ruby George for the Appellant. G. Bhaskar for the Respondent.
ORDER
Challa Nagendra Prasad, Judicial Member - This is an appeal filed by the Revenue against the order of the Commissioner of Income Tax (Appeals)-I, Coimbatore dated 28.08.2012 in ITA No.353/11-12 for the assessment year 2009-10. The only grievance of the Revenue in this appeal is that the Commissioner of Income Tax (Appeals) erred in deleting the disallowance under section 40(a)(i) of the Act holding that the assessee is not liable to deduct tax at source on the commission payments made to non-residents under section 195 of the Act.
2. Brief facts of the case are that the assessee is a company engaged in the business of manufacture and export of shoe uppers and leather shoes. The assessee filed return of income on 29.9.2009 declaring income of Rs. 21,77,570/-. The assessment was completed under section 143(3) on 9.12.2011 determining income of Rs. 2,28,77,350/-. While completing the assessment, the Assessing Officer disallowed Rs. 2,06,99,780/- under section 40(a)(i) stating that the assessee did not deduct TDS on the commission payments made to non-residents. The Assessing Officer held that the assessee made commission payments to non-residents and these payments are nothing but commission for the services rendered by the non-residents and such payments are deemed income under section 9(1)(vii) of the Act. The Assessing Officer was of the view that the payments to non-residents is the income deemed to accrue or arise in India under clause (vii) of sub-section (1) of Section 9. The Assessing Officer was of the view that in view of the withdrawal of circular No.23 of 1969 by the CBDT, the commission payments to non-residents are liable to be taxed. He was also of the view that in view of the Explanation to sub-section (2) of Section 9, income of a non-resident shall be deemed to accrue or arise in India under clause (v) or clause (vi) or clause (vii) of sub-section (1) of section 9, whether or not the non-resident has a residence or place of business or business connection in India or the non-resident had rendered services in India. It was the contention of the assessee before the Assessing Officer that these payments were made to non-residents towards commission for procuring export orders and follow up of the payments. Non-residents did not provide any technical services to the assessee except procuring orders and following up of the payments and non-residents have no permanent establishment in India. All orders are procured from outside India and services are rendered outside India. It was the contention of the assessee that the commission payments made to non-residents are not taxable in India, hence no TDS is required to be deducted under section 195 of the Act. However, the Assessing Officer relying on the decision of the Hon'ble Supreme Court in the case of Transmission Corpn. of Andhra Pradesh Ltd. v. CIT [1999] 239 ITR 587/105 Taxman 742 disallowed commission payments made to non-residents on the ground that the assessee is under an obligation to obtain no objection for making payments to non-residents under section 192 and in the absence of same, the assessee is required to be deducted TDS and since the assessee did not deduct TDS the same is liable to be disallowed under section 40(a)(i) of the Act. On appeal, the Commissioner of Income Tax (Appeals) after considering the submissions of the assessee and examining the agreements with commission agents by the assessee held that no TDS is required to be made under section 195 on the payments made towards commission to the non-residents. The Revenue is in appeal before us.
3. The Departmental Representative vehemently supported the order of the Assessing Officer in disallowing the commission payments to non-residents for non-deduction of TDS.
4. The counsel for the assessee strongly relied on the order of the Commissioner of Income Tax (Appeals) in deleting the disallowance made.
5. Heard both sides. Perused the orders of lower authorities. The Assessing Officer disallowed the commission payments made to non-residents holding that in view of Explanation to sub-section (2) of Section 9, these payments are deemed to accrue or arise in India and whether or not the non-resident has a residence or place of business or business connection in India. The Assessing Officer was of the view that in view of withdrawal of circular by CBDT, the payment made to non-residents towards commission is liable to be subjected to TDS. However, the Commissioner of Income Tax (Appeals) after examining the agency agreements entered into by the assessee with the non-residents held that the agency agreement was only for securing orders from various customers including retailers and traders for the export of leather shoe uppers and leather shoes by the assessee. The business will be transacted by opening letters of credit or by cash against document basis and the agent will be responsible for prompt payment in respect of all shipments effected on cash against document basis. The Commissioner of Income Tax (Appeals) observed that exporter will pay commission of 2.5% on FOB value of all orders procured by the agent. The Commissioner of Income Tax (Appeals) also observed that the withdrawal of circular No.23/1969 by the Board vide circular No.7/2009 is not applicable for the assessment year 2009-10, since the circular was withdrawn on 22.10.2009, therefore, circular No.23 of 1969 is very much applicable to the facts of the assessee. It was the observation of the Commissioner of Income Tax (Appeals) that the services rendered by non-resident agents to the assessee do not fall under the provisions of section 9(1)(vii) of the Act, as no technical services have been provided by the agents. It was also the observation of the Commissioner of Income Tax (Appeals) that there was no question of payment of royalty or technical fees to the agents on contract with the assessee. He has finally concluded that all the conditions bring to a reasonable conclusion that the commission paid in the facts of the present case to the non-resident agents is not taxable in India. In coming to such conclusion, the Commissioner of Income Tax (Appeals) observed as under:-
"4.3 As seen from the facts of this case,
| ♦ | Agent is a non-resident. | |
| ♦ | Agent is operating his business activities outside India. | |
| ♦ | The commission paid related to services provided outside India. | |
| ♦ | The agent does not have any permanent establishment or permanent business place in India. | |
| ♦ | The commission was remitted to the agent directly outside India. |
4.4 All the above conditions bring to a reasonable conclusion that the commission paid in the facts of the present case to the non-resident agent is not taxable in India. The ITAT Madras 'A' Bench in the case of lndopel Garments (P.) Ltd 72 DJ 702 stated that lithe commission payable to foreign concern for acting as a selling agent for canvassing order outside India was not liable to tax as income arising or accruing to the foreign concern in India and therefore, no disallowance could be made u/s 40A(i) on the ground that tax was not deducted at source under section 195.
4.5 The Hon'ble Supreme Court overruled the decision of the Karnataka High Court in Samsung Electronics Limited case in the case of GE India Technology Cen.(P) Ltd. v. CIT [2010] 327 ITR 456 (Se). The ITAT, Mumbai 'D' Bench in the case of DICT Range-7(2), Mumbai Vs Rediff.com India Limited in Appeal No.3061 (Mum.) of 2009 held that "As held by the Supreme Court in the case of GE India Technology Centre (P.) Ltd v. CIT (2010) 327 ITR 456/193 Taxman 234, tax deduction at source obligations under section 195(1) arise only if the payment is chargeable to tax in the hands of non-resident recipient. Therefore, merely because a person has not deducted tax at source from a remittance abroad, it cannot be inferred that the person making the remittance has committed a default in discharging his tax withholding obligations because such obligations came into existence only when recipient has a tax liability in India. The underlying principle is this. Tax withholding liability of the payer is inherently a vicarious liability, on behalf of the recipient, and, therefore, when recipient does not have the primary liability to be taxable in respect of income embedded in the receipt, the vicarious liability of the payer cannot but be ineffectual. This vicarious tax withholding liability cannot be invoked unless primary tax liability of the recipient is established. Just because the payer has not obtained a specific declaration from the revenue authorities to the effect that the recipient is not liable to be taxed in India in respect of income embedded in particular payment, howsoever desirable be that practice, the Assessing Officer cannot proceed on the basis that the payer had an obligation to deduct tax at source. He still has to demonstrate and establish that the payee has a tax liability in respect of the income embedded in the impugned payment. That exercise was not carried out by the Assessing Officer on the facts of this case. The Assessing Officer was thus clearly in error in proceeding to invoke disallowance under section 40(a)(i) on the short ground that the assessee did not deduct tax at source from the foreign remittance". The ITAT 'D' Bench, in the case of ACIT, Company Circle-II(I) v. M/s Eagle Press (P.) Ltd on similar facts, relying on the judgement of Hon'ble Supreme Court in case ofGE India Technology Centre (P.) Ltd v. CIT and another 327 ITR 456 held that the liability of TDS is not cast on the assessee, where the services were rendered outside India and such services were rendered by non-residents. Referring to the above discussion and the judgements relied on by the appellant in his submissions, I direct the Assessing Officer to delete the addition. This ground of appeal is allowed."
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 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. v. CIT [2010] 327 ITR 456/193 Taxman 234/7 taxmann.com 18 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 non-residents 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.
7. In the result, the appeal of the Revenue is dismissed.
SUNILRegards
Prarthana Jalan
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