IT/ILT: Export commission, paid to foreign agent for procuring order and pursuing payment from foreign buyer, is not taxable as no services are rendered in India
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[2013] 37 taxmann.com 135 (Delhi - Trib.)
IN THE ITAT DELHI BENCH 'A'
Allied Nippon Ltd.
v.
Deputy Commissioner of Income-tax, Circle-1(1), New Delhi*
G.D. AGRAWAL, VICE-PRESIDENT
AND A.D. JAIN, JUDICIAL MEMBER
AND A.D. JAIN, JUDICIAL MEMBER
IT APPEAL NOS. 6497 (DELHI) OF 2012 & 188 (DELHI) OF 2013
[ASSESSMENT YEAR 2008-09]
[ASSESSMENT YEAR 2008-09]
JULY 19, 2013
Section 9, read with sections 195 and 40(a)(i), of the Income-tax Act, 1961 - Income - Deemed to accrue or arise in India [Export commission to foreign agent] - Assessment year 2008-09 - Whether, export commission paid to foreign agent for procuring order and pursuing payment from foreign buyer did not accrue or arise in India as no services were rendered in India - Held, yes [Para 6] [In favour of assessee]
CASE REVIEW
CIT v. EON Technology (P.) Ltd. [2011] 203 Taxman 266/15 taxmann.com 391 (Delhi) (para 6) followed.
CASES REFERRED TO
CIT v. EON Technology (P.) Ltd. [2011] 203 Taxman 266/15 taxmann.com 391 (Delhi) (para 4) and AMD Metplast (P.) Ltd. v. Dy. CIT [2012] 341 ITR 563/20 taxmann.com 647 (Delhi) (para 9).
U.N. Marwah for the Appellant. Bhim Singh for the Respondent.
ORDER
G.D. Agrawal, Vice-President - This appeal by the assessee is directed against the order of learned CIT(A)-IV, New Delhi dated 8th October, 2012 for the AY 2008-09.
ITA No.6497/Del/2012 - Assessee's appeal
2. Ground No.1 of the assessee's appeal reads as under:-
"1. On the facts and in the circumstances of the case, the learned Commissioner of Income Tax (Appeals) erred in law in sustaining the addition of Rs. 3,42,821/- paid as export commission:-
| (a) | Holding that the payment of export commission is subject to tax deduction at source in terms of Section 195; | |
| (b) | Holding that Section 40(a)(i) of the Act, is attracted in respect of said payment; | |
| (c) | Holding that the services rendered by the foreign agent outside India for securing export orders, shall be deemed to accrue or arise in India within the meaning of Section 9 of the Income Tax Act." |
3. Ground No.2 is only argument in support of above ground No.1.
4. At the time of hearing before us, it is submitted by the learned counsel that this issue is squarely covered in favour of the assessee by the decision of Hon'ble Jurisdictional High Court in the case of CIT v. EON Technology (P.) Ltd. [2011] 203 Taxman 266/15 taxmann.com 391 (Delhi). He stated that in the case of the assessee also, the export commission is paid to the non-resident who rendered the services outside India for the purpose of procuring the order and pursuing the payment from the foreign buyer. Since no services were rendered in India, the income of the foreign agent to whom the commission was paid did not accrue or arise in India, therefore, the assessee was not liable to deduct tax at source. Consequently, the disallowance under Section 40(a)(i) is not called for.
5. Learned DR, on the other hand, relied upon the orders of authorities below.
6. After careful consideration of arguments of both the sides and the facts of the case, we find that the issue is squarely covered in favour of the assessee by the decision of Hon'ble Jurisdictional High Court in the case of EON Technology (P.) Ltd. (supra), wherein their Lordships held as under:—
"It is apparent from section 5(2) that total income of previous year of a person, who is a non-resident, is chargeable to tax in India if it is received or is deemed to be received in India or accrues or arises or is deemed to accrue or arise to him in India. Explanation 1 to the said section stipulates that income accruing or arising outside India shall not be deemed to be received in India within the meaning of the said section by reason of the fact that it is taken into account in the balance sheet prepared in India. Explanation 1 is a complete answer to the observations of the Assessing Officer that commission income had accrued, arisen or was received by ETUK in India because it was recorded in the books of assessee in India or was paid by the assessee situated in India.
Section 9 postulates and states when income is deemed to arise in India. The Assessing Officer has not mentioned any specific provision of section 9 but it appears that he had invoked section 9(1)(i).
For the said provision to apply, the Assessing Officer was required to examine whether the said commission income is accruing or arising directly or indirectly from any business connection in India. The Assessing Officer has not dealt with or examined the said aspect but has merely recorded that the payment made to ETUK was taxable in India because of its 'business connection'. The Assessing Officer did not elaborate or has not discussed on what basis he had come to the conclusion that 'business connection' as envisaged under section 9(1)(i) existed. On this aspect, the assessee had submitted that ETUK was a non-resident company and did not have any permanent establishment in India. ETUK was not rendering any service or performing any activity in India itself.
According to the revenue, commission income had accrued and arisen in India when credit entries were made in the books of the assessee in favour of the ETUK and the said income towards commission was received in India. The stand of the revenue is contrary to the two circulars issued by the CBDT in which it is clearly held that 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 account is made, it does not mean that the non-resident has received any payment in India. This fact alone does not establish business connection. In Circular No.786, dated 7-2-2000, it has been stated that in such cases, the Indian assessee is not liable to deduct TDS under section 195 from the commission and other related charges payable to such a non-resident having rendered service outside India.
The term 'business connection' has been interpreted by the Supreme Court to mean something more than mere business and is not equivalent to carrying on business, but a relationship between the business carried on by a non-resident, which yields profits and gains and some activities in India, 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 India.
The test which is to be applied is to examine the activities in India and whether the said activities have contributed to the business income earned by the non-resident, which has accrued, arisen or received outside India. The business connection must be real and intimate from which the income had arisen directly or indirectly. The question of business connection, therefore, has to be decided on facts found by Assessing Officer (or in the appellate proceedings). In the instant case, facts found by the Assessing Officer did not make out a case of business connection as stipulated in section 9(1)(i). There is hardly any factual discussion on the said aspect by the Assessing Officer. He has not made any foundation or basis for holding that there was business connection and, therefore, section 9(1)(i) is applicable. Appellate authorities, on the basis of material on record, have rightly held that 'business connection' is not established.
In view of the aforesaid discussion, there is no error in the findings recorded by the Commissioner (Appeals) which have been upheld in the impugned order by the Tribunal."
7. The facts of the assessee's case are identical. We, therefore, respectfully following the above decision of Hon'ble Jurisdictional High Court, delete the disallowance of Rs. 3,42,821/- made by the Assessing Officer under Section 40(a)(i) of the Act.
ITA No.188/Del/2013 - Revenue's appeal
8. The only ground raised by the Revenue in this appeal reads as under:—
"Whether the ld. CIT(A) has erred in law and on facts in deleting the addition of Rs. 30,71,600/- made u/s 36(1)(ii) on account of Bonus/Commission paid to the Directors of the company, ignoring the facts that as per the provisions of Section 36(1)(ii) the Bonus/Commission paid to an employee is not allowable as deduction if it could have been paid as profit or dividend."
9. We have heard both the parties and perused the material placed before us. We find that this issue is also covered in favour of the assessee by the decision of Hon'ble Jurisdictional High Court in the case of AMD Metplast (P.) Ltd. v. Dy. CIT [2012] 341 ITR 563/20 taxmann.com 647 (Delhi), wherein their Lordships held as under:—
"allowing the appeal, that A was the managing director and in terms of the board resolution was entitled to receive commission for services rendered to the company. It was a term of employment on the basis of which he had rendered service. Accordingly, he was entitled to the amount. Commission was treated as a part and parcel of salary and tax had been deducted at source. A was liable to pay tax on both the salary component and the commission. The payment of dividend was made in terms of the Companies Act, 1956. The dividend had to be paid to all shareholders equally. This position could not be disputed by the Revenue. Dividend was a return on investment and not salary or part thereof."
10. That the ratio of the above decision would be squarely applicable to the facts of the assessee's case. In this case, the assessee has paid commission in addition to salary to two of its directors, viz., Shri Ravi Talwar and Smt. Madhu Talwar. That on page 20 of learned CIT(A)'s order, he has given the complete break-up of the shareholding of the assessee company. For ready reference, the same is being reproduced below:—
| Sl. No | No. of shares | % age |
| (A) Foreign Collaborator | 1,248,000 | 19.82% |
| (B) Foreign Companies | 1,060,721 | 16.85% |
| (C) Non-resident individuals | 695,413 | 11.05% |
| (D) Promoters and relatives | ||
| Ravi Talwar | 3,500 | 0.06% |
| Madhu Talwar | 159,150 | 2.53% |
| Other promoters and relatives | 191,450 | 3.04% |
| 354,100 | 5.62% | |
| (E) Domestic Companies | 2,792476 | 44.36% |
| (F) Resident Individuals | 145,000 | 2.30% |
| Total | 6,295,710 | 100.00% |
11. From the above, it is evident that the shareholding of both the directors taken together is 2.56% only while more than 97% shares are held by others. Around 48% shares are held by foreign collaborators, foreign companies and non-resident individuals. That the payment of commission to above two directors is duly supported by the Board's resolution. Both the directors are working full time for the assessee company and the commission paid to them has been considered as salary in their hands and offered for taxation. The assessee has filed the copy of computation/assessment order of both the directors to whom the commission has been paid. That the payment of commission in the earlier three years i.e. AY 2005-06, 2006-07 & 2007-08 has been allowed by the Revenue. Moreover, it was also stated by the assessee's counsel at the time of hearing that in the subsequent years also, no disallowance out of commission has been made. That the payment of dividend has been made in terms of the Companies Act, 1956 to the shareholders as per their shareholding. On all these facts, the decision of Hon'ble Jurisdictional High Court in the case of AMD Metplast (P.) Ltd. (supra) would be squarely applicable. Respectfully following the same, we uphold the order of learned CIT(A) on this point and dismiss the appeal filed by the Revenue.
12. In the result, the appeal of the Revenue is dismissed and the appeal of the assessee is allowed.
P-SENRegards
Prarthana Jalan
__._,_.___
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