Case Law Details
Recently, the ITAT Delhi in the case of Eon Technology (P) Ltd. Vs. DCIT [2011] 11 taxmann.com 53 (Del) /(343 ITR 366) (Del) held that payment by way of commission for sales and marketing support outside India does not constitute income chargeable to tax in India under the Income-tax act, 1961 (the Act).
Facts of the case
- The taxpayer was engaged in the business of development and export of software. The taxpayer claimed a deduction of INR 3,336,068 representing commission paid to M/s Eon Technologies, UK (ETUK) under an agreement with ETUK. As per the agreement, since the taxpayer was not in a position to interact and set up sales and marketing support management operations in the clients’ locations, ETUK was to invest in and operate the sales and marketing operations from UK.
- The taxpayer did not deduct tax at source in respect of the above payment on the premise that the payee was non- resident and the entire services had been rendered outside India. Accordingly, no income would either accrue or arise or deemed to accrue or arise to the payee in India.
- The Assessing Officer (AO) observed that ETUK being the sole selling and marketing agent for the taxpayer, it was rendering the service of the sale agent, thereby enabling it to earn the right to receive the income from the taxpayer. The AO further observed that since the situs or the origin of the receipt was in India, the income was liable to tax in India and that it was the corresponding liability of the taxpayer to make the payment of the amount at the place of accrual of the income and this having not being done, the AO made a dis allowance under section 40(a)(i) of the Act in respect of payments made to ETUK since tax was not deducted at source under section 195(1) of the Act.
- The Commissioner of Income-tax [CIT (A)] relying on the decision of GE India Technology Centre Private Limited reported in (2010) 327 ITR 456 (SC) held that charge ability to tax of the sum paid under the provisions of the Act was a statutory pre- condition for invoking section 195(1) of the Act and that commission paid by the taxpayer to ETUK which had rendered services outside India was not chargeable to tax in India and hence not subject to the provisions of section 195(1) of the Act. The [CIT (A)] further relying on the decision of CIT v. Toshoku Ltd. [1980] 125 ITR 525 (SC), wherein it was held that “business connection” presupposes that the non-resident carried on business in India, contended that since no business was carried out in India by ETUK, it had no business connection and the commission earned did not deem to accrue or arise in India.
Taxpayer’s contentions
- The taxpayer contended that there was no business connection between the taxpayer and ETUK in India and so, ETUK did not acquire any right to receive income earned in India; ETUK had rendered services outside India. Further, the contract between the taxpayer and ETUK was itself entered into, since the taxpayer was not in a position to interact and set up sales and marketing support management operations in its clients’ locations.
- The taxpayer further contended that commission paid did not constitute or give rise to any income chargeable in India either under the Act or under the India-UK (tax treaty), thereby no tax was deductible under section 195 of the Act and no dis allowance ought to have been made under section 40(a)(i) of the Act.
- The taxpayer relying on the Circular No. 786 dated 7 February 2000 and 23 dated 23 July 1969 of the Central Board of Direct Taxes (CBDT) contended that commission paid to non resident Indians for the services rendered outside India are not chargeable to tax in India since ETUK had no operations in India, the commission earned by ETUK could not be held to be attributable, either directly or indirectly, to any operations carried out in India.
Tax Department’s contention – Relying on the decision of Transmission Corporation of Andhra Pradesh Ltd v. CIT 239 ITR 587 (SC)where the taxpayer disputed the liability to deduct tax at source, it was incumbent for the taxpayer to file an application before the AO for determination of sum chargeable to tax and since the same was not done, the dis allowance under section 40(a)(i) of the Act was justified.
Issues before the Tribunal -The issue before the Tribunal was whether the dis allowance made under section 40(a)(i) of the Act with regards to the commission paid by the taxpayer to ETUK without deducting tax at source was justified.
Tribunal’s ruling
- The Tribunal observed that operations carried out by ETUK were not carried out in India. Further ETUK did not have a permanent establishment (PE) in India. ETUK was acting as the taxpayer’s marketing agent and was providing marketing and sales support for the sales executed by the taxpayer for its overseas clients. It was for the rendering of this service that the commission was paid by the taxpayer to ETUK. Therefore, according to section 9(1 )(i) of the Act, there was no deemed accrual of income in India. The Tribunal further observed that there was no income which could be included in the total income of ETUK under section 5(1) of the Act. Therefore, there was no case of charging income tax in respect of the commission payment made by the taxpayer to ETUK under section 4(1) of the Act.
- The Tribunal further observed that since the charging section did not come into operation, there was no question of the provisions of section 195(1) of the Act to come into force. The Tribunal further observed that the words used in the case of Transmission Corporation of Andhra Ltd. were “any other sum chargeable under the provisions of this Act” which included sum on which income tax was leviable. The Tribunal observed that in the instant case, since TDS was not to be made on the commission paid, there was no question of dis allowance under section 40(a)(i) of the Act.
- The Tribunal further relying on the decision of GE India Technology Center and CIT v. Cooper Engineering [1968] 68 ITR 457 (Mum) observed that if payment made by the resident to the non-resident was not liable to tax under the Act, then no tax was deductible at source even though no application was made by the taxpayer.
- The Tribunal further held that the learned CIT (A) has rightly relied on the Circular Nos. 786 and 23 supra; and that CBDT Circulars are binding on the Taxing authorities.
Our Comments – The Tribunal has dealt with the issue of dis allowance made under section 40(a)(i) of the Act on account of non deduction of tax at source for the payment made by way of commission to non-resident for rendering sales and marketing services outside India and held that such income was not liable to tax in India. The Delhi Tribunal has relied on the earlier judicial pronouncements of the Supreme Court wherein it has been held that a payer is bound to deduct tax at source only if the tax is asses sable in India. It may be noted here that the Circular nos.23 and 786 supra (which provided clarifications in deciding questions regarding the applicability of the provisions of section 9 of the Act in certain specific situations), which was discussed in the above case, have since been withdrawn vide Circular no. 7 dated 22 October 2009 . The implications of such withdrawal on the specific facts of each case would need to be analyzed.
