IT/ILT : Sum paid to NR for canvassing business abroad is not taxable in India even after amendment to section 9(2) by Finance Act, 2010
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[2013] 38 taxmann.com 158 (Chennai - Trib.)
IN THE ITAT CHENNAI BENCH 'B'
Assistant Commissioner of Income-tax, Company Circle -I (3)
v.
Capricorn Food Products India Ltd.*
ABRAHAM P. GEORGE, ACCOUNTANT MEMBER
AND V. DURGA RAO, JUDICIAL MEMBER
AND V. DURGA RAO, JUDICIAL MEMBER
IT APPEAL NO. 1247 (MDS.) OF 2013
[ASSESSMENT YEAR 2008-09]
[ASSESSMENT YEAR 2008-09]
AUGUST 29, 2013
Section 9, read with sections 40(a)(ia) and 195, of the Income-tax Act, 1961 - Income - Deemed to accrue or arise in India [Business profits] - Assessment year 2008-09 - Assessee exporter claimed deduction on commission paid to agents abroad who were canvassing for assessee in overseas market - During relevant year, when assessee had effected payments to foreign agents, such payments were not income of non-residents exigible for tax in India - Whether neither subsequent circular allegedly withdrawing benefits given to assessee, nor addition of Explanation to section 9(2) through Finance Act, 2010 with retrospective effect from 1-6-1976 would have any effect on taxability of such income earned by non-resident agents outside India during relevant year in course of his business or profession carried out outside India - Held, yes [Para 7] [In favour of assessee]
Circulars and Notifications : Circular Nos. 23 dated 23-7-1969, 786 dated 7-2-2000 and 7 dated 22-12-2009
FACTS
| ■ | The assessee was engaged in export of food product. | |
| ■ | The assessee had paid and claimed sales commission to agents abroad but did not deduct tax at source relying on Circular No. 786, dated 7-2-2000. | |
| ■ | According to the Assessing Officer:- |
| - | Circular No. 7/2009 dated 22-10-2009 had made Circular No. 23 dated 23-7-1969 and Circular No. 786 dated 7-2-2000redundant. | |
| - | When source of income emanated from business activities of assessee in India, the taxability of income was governed by section 9. | |
| - | Since the assessee had not deducted tax at source on managerial service rendered by the foreign agents, the rigours of section 40(a)(i) was attracted to disallow the payment. |
| ■ | On appeal, the Commissioner (Appeals) held that :- |
| - | At the time when the assessee effected the payments to the foreign agents, what was applicable was Circular No. 786 of 7-2-2000. The assessee could not foresee that the CBDT would withdraw the benefits given under Circular No. 786 dated 7-2-2000 through subsequent circulars. Doctrine of promissory estopple applied. | |
| - | Since there was no permanent establishment for non-resident in India, there could be no liability in India for such non-resident for their business earnings and, thus, the assessee was well covered by Circular No. 786. |
| ■ | Thus, she deleted the disallowance. | |
| ■ | On further appeal: |
HELD
| ■ | The Assessing Officer had made disallowance under section 40(a)(i) for a reason that assessee could not take benefit of Circular No. 786 dated 7-2-2000. However, the subsequent Circular No. 7/2009 dated 22-10-2009, which allegedly withdrew the benefits given to an assessee under Circular No. 786 dated 7-2-2000 and Circular No. 23 dated 23-7-1969, were not there, when assessee made payments to non-resident agents since the relevant previous year was 2007-08. Assessee therefore was definitely saved by the doctrine of promissory estoppel. At the time when it had effected the payments to foreign agents, it could reasonably have held the bona fide belief that such payments were not income of the non-resident, exigible for tax in India. Once assessee held a bona fide belief that the payments made to non-residents, were not taxable in India, then it could not be fastened with a liability to deduct tax under section 195. In any case, Assessing Officer has not given any finding that the non-residents had rendered any services which were in the nature of technical services. There is nothing on record to show that any technical knowledge was made available to the assessee through the services rendered by the non-residents, which assessee could make use of in future. In any case, sub-clause (b) of clause (vii) of section 9(1) clearly mentions that fees paid in respect of services utilized in a business or profession carried on by such person outside India or for the purpose of making or earning income from any source outside India, would not come within the purview of income by way of fees for technical services. Addition of Explanation to sub-section (2) to section 9 through Finance Act, 2010 with retrospective effect from 1-6-1976 will, therefore, have no effect on taxability of income earned by non-resident outside India in the course of his business or profession carried out outside India by him. There is no case for the revenue that the foreign agents were not engaged in a business of earning commission by canvassing market overseas. Therefore, the Commissioner (Appeals) was justified in deleting the disallowance. [Para 7] |
Guru Bashyam for the Appellant. J. Prabhakar for the Respondent.
ORDER
Abraham P. George, Accountant Member - In this appeal filed by the Revenue, it is aggrieved that the CIT(Appeals) deleted a disallowance of Rs. 58,02,597/- made by the Assessing Officer under Section 40a(i) of Income-tax Act, 1962 (in short 'the Act'), for want of deduction of tax at source on commission paid to foreign agents.
2. Assessee, engaged in export of food products, had filed its return for impugned assessment year declaring an income of Rs. 45,66,550/-. During the course of assessment proceedings, it was noted by the Assessing Officer that assessee had paid sales commission of Rs. 58,02,597/- to agents abroad. As per A.O., assessee failed to deduct tax at source. Though assessee had relied on Circular No.786 dated 7.2.2000 for non-deduction of tax at source, the A.O. was not impressed. According to him, Circular No.7/2009 dated 22.10.2009 had made Circular No.23 dated 23.7.1969and Circular No.786 dated 7.2.2000 redundant. When the source of income emanated from business activities of the assessee in India, the taxability of income was governed by Section 9 of the Act. Assessee having not deducted tax at source on the managerial service rendered by the foreign agents, Assessing Officer was of the opinion that rigours of Section 40a(i) was attracted. He disallowed the claim of Rs. 58,02,597/-.
3. In its appeal before CIT(Appeals), argument of the assessee was that at the time when assessee effected the payments to the foreign agents, what was applicable was Circular No.786 of 7.2.2000. Assessee could not foresee that the CBDT would withdraw the benefits given under Circular No.786 dated 7.2.2000 through subsequent circulars. Doctrine of promissory estoppel applied. Assessee having acted on a bonafide impression that no deduction of tax at source was required, could not be fastened with the peril of an injury caused due to subsequent withdrawal of circular.
4. CIT(Appeals) was impressed by the argument of the assessee. He held that there was no permanent establishment for the non-residents in India and therefore, there could be no liability in India for such non-residents for their business earnings. According to her, assessee was well covered by Circular No.786. Thus, she deleted the disallowance.
5. Now before us, Shri Guru Bashyam, appearing for the Revenue, submitted that by virtue of amendment to Section 9(2) of the Act, through Finance Act, 2010, whereby an explanation was added with retrospective effect, the requirement of having a residence or place of business or business connection in India for non-residents was no more there. This amendment, according to him, had retrospective effect from 1.6.1976. The requirement that non-residents should have rendered services in India for bringing such non-residents within the ambit of Indian taxation, stood obviated. According to him, the services rendered by the non-resident agents to the assessee fitted within the definition of "fees for technical services" given under Explanation (2) to Section 9(1)(vii) of the Act. The said foreign agents were rendering managerial services to the assessee. Therefore, assessee should have deducted tax at source as stipulated under Section 195 of the Act. Having not done so, Assessing Officer was justified in applying Section 40a(i) for making a disallowance. Learned D.R. submitted that the CIT(Appeals) fell in error by giving benefit of Circular No.786 dated 7.2.2000 to the assessee despite such Circular having become redundant by virtue of Circular No.7/2009 dated 22.10.2009.
6. Per contra, Sh. J. Prabhakar, FCA, ld. Counsel for the assessee, strongly supported the order of CIT(Appeals).
7. We have perused the orders and heard the rival submissions. The A.O. had made disallowance under Section 40a(i) for a reason that assessee could not take benefit of Circular No.786 dated 7.2.2000. However, the subsequent Circular No.7/2009 dated 22.10.2009, which allegedly withdrew the benefits given to an assessee under Circular No.786 dated 7.2.2000 and Circular No.23 dated 23.7.1969, were not there, when assessee made payments to non-resident agents since the relevant previous year was 2007-08. Assessee therefore was definitely saved by the doctrine of promissory estoppel. At the time when it had effected the payments to foreign agents, it could reasonably have held the bonafide belief that such payments were not income of the non-residents, exigible for tax in India. Once assessee held a bonafide belief that the payments made to non-residents, were not taxable in India, then it could not be fastened with a liability to deduct tax under Section 195 of the Act. In any case, Assessing Officer has not given any finding that the non-residents had rendered any services which were in the nature of technical services. There is nothing on record to show that any technical knowledge was made available to the assessee through the services rendered by the non-residents, which assessee could make use of in future. In any case, sub-clause (b) of clause (vii) of Section 9(1) of the Act clearly mentions that fees paid in respect of services utilized in a business or profession carried on by such person outside India or for the purpose of making or earning income from any source outside India, would not come within the purview of income by way of fees for technical services. Addition of Explanation to sub-section (2) to Section 9 through Finance Act, 2010 with retrospective effect from 1.6.1976 will therefore have no effect on taxability of income earned by non-resident outside India in the course of his business or profession carried out outside India by him. There is no case for the Revenue that the foreign agents were not engaged in a business of earning commission by canvassing market overseas. We are, therefore, of the opinion that ld. CIT(Appeals) was justified in deleting the disallowance. No interference is required.
8. In the result, appeal filed by the Revenue is dismissed.
SBRegards
Prarthana Jalan
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