IN THE ITAT HYDERABAD BENCH ‘A’
Assistant Commissioner of Income-tax, Circle-16(3)
Priyadarshini Spinning Mills (P.) Ltd.
IT Appeal No. 1776 (Hyd.) of 2011
[Assessment year 1998-99]
JULY 6, 2012
Saktijit Dey, Judicial Member
This appeal filed by the Revenue is directed against order dated 2-8-2011 of CIT(A)-V, Hyderabad and it pertains to the assessment year 1998-99.
2. Grounds raised by the Revenue read as under:-
“1. The CIT(A) erred both in facts and law.
2. The CIT(A) erred in deleting the addition of Rs.80,50,703/- towards commission on export sales.
3. The CIT(A) ought to have appreciated the fact that the provisions of section 195 of IT Act are clearly applicable in the case of the assessee and as the assessee failed to deduct tax at source, the disallowance made u/s 40(a)(i) ought to have been upheld.
4. The CIT(A) ought to have held that the provisions of section 5(2)(a) are applicable as the commission payments are deemed to have been received in India.
5. Any other ground that may be urged at the time of hearing before the Tribunal.”
3. Ground Nos. 1 and 5 are general in nature and they do not require any adjudication.
4. The sole issue arising for consideration is whether commission paid to non resident agents is chargeable to tax under the Act thereby necessitating deduction of tax at source u/s 195(1) of the Act.
5. Brief facts are the assessee is engaged in manufacture and sale of cotton and synthetic yarn. In course of the assessment proceedings, the AO found that the assessee has paid an amount of Rs. 80,50,703/- to non resident agents without deducting tax at source. The AO therefore disallowed the entire amount u/s 40(a)(i) and added it to the total income. The assessee challenged the addition before CIT(A). The CIT(A) deleted the addition relying upon his order passed in case of M/s Newland Laboratories Limited. The CIT(A)’s order was challenged in appeal before the ITAT. The ITAT set aside the issue to the file of the AO with the following direction:-
“In respect of the payment of commission, each case depends upon its own facts. The revenue authorities are expected to examine the agreement entered into in each case and the intention of the parties in making the payment and thereafter, record an independent conclusion as to whether the payment was made in India at the request of the foreign agent. Since such exercise was not done in this case, we restore the matter to the file of the AO. The AO shall examine the issue after considering all the contentions of the assessee in the light of the Apex Court in the case of Ogale Glass Works Limited and thereafter, decide the issue in accordance with law after giving reasonable opportunity to the assessee.”
6. In re-assessment proceedings in compliance to the direction of the ITAT, the assessee appeared and produced all relevant documents relating to export sales and also commission payment to foreign agents, the AO after examining the agreements with the foreign agents came to a conclusion that though the agreement is silent on the mode and manner of payment of commission and there is also no written instructions from the agents, the fact that the assessee has paid commission purchasing DDS from Banks in Hyderabad and sent them through courier reveals the intention of parties that it was done on the oral request of the foreign agents. Therefore, the payment of commission is liable to be taxed in India u/s 5(2)(a) of the Act. The assessee having failed to deduct tax at source the entire commission amount was disallowed u/s 40(a)(i). The assessee challenged the addition in appeal before the CIT(A). The assessee contended before the CIT(A) that the non resident agents appointed by assessee did not carry on any business operations in India nor they have any permanent establishment in India. They acted as assessee’s selling agents outside India. The commission earned by the non resident agents were for services rendered by them outside India. In these circumstances, the commission paid to them cannot be treated as income deemed to have accrued or arisen in India. The assessee submitted that the commission amounts were directly remitted to the agents and were not received by them or anyone else on their behalf in India. Relying upon the decision of Hon’ble Supreme Court in the case of CIT v. Toshoku Ltd.  125 ITR 525 and circular No. 786 dated 7-2-2001 and Circular No. 23 in F No. 7A/38/69-IT(A)-11 dated 23-7-69. The assessee contended that the foreign agents are not chargeable to tax on the commission received by them. Relying upon a decision of the Hon’ble Calcutta High Court in case of Indian Aluminium Co. v. CIT  140 ITR 114, the assessee contended that purchasing DDs from Banks in Hyderabad and sending them through courier will not lead to the inference that commission was paid in India. The CIT(A) on examining the terms of the agreement between the assessee and non-resident agents found that there is nothing in the agreement stipulating the mode or manner of payment like DDs are to be purchased in India. There is also nothing on record to suggest that the non resident agents have requested the assessee to purchase DDs in India and send them through courier. The CIT(A) came to the conclusion that when there is no such stipulation in the agreement, the AO unilaterally cannot presume that DDs were purchased in India and sent through courier at the request of the non resident agents. The CIT(A) relying upon the decisions of the ITAT, Hyderabad Bench in IT Appeal No. 692 and 693/Hyd/2000 dated 24-8-2007 in case of Dr. Reddy’s Laboratories v. Jt. CIT and in IT Appeal No. 84-85/Hyd/02 dated 30-5-2008 in case of Dy. CIT v. Hyderabad Industries Ltd. came to hold that no disallowance can be made u/s 40(a)(i) as the commission paid to non resident agents were not subject to tax in India.
7. The learned DR strongly supporting the order passed by the AO submitted that as per sec. 5(2)(a) the commission paid should be deemed to have accrued or arose in India therefore disallowance u/s 40(a)(i) is justified as the assessee has not deducted tax at source.
8. The learned AR apart from making his oral submissions has filed elaborate written submissions more or less reiterating the stand taken before the CIT(A). The gist of the submissions made by the ld. AR is:-
(i) The non resident agents did not carry out any business operations within the taxable territory of India. They acted as selling agents outside India. Therefore, income accrued or arose in India in view of the judgment of Hon’ble Supreme Court in case of Toshoku Ltd. (supra).
(ii) There is nothing on record to show that the non resident agents received the commission in India. Merely because the assessee has made entries in his books of accounts crediting commission in the name of non resident agent, it will be deemed to have received in India by the agent or on his behalf as per sec. 5(2)(a).
(iii) The AO cannot make disallowance u/s 40(a)(i) only because the DDs were purchased from banks in Hyderabad and sent them through courier to the non resident agents in view of the decision of the Hon’ble Calcutta High Court in case of Indian Aluminium Co. Ltd. (supra).
(iv) CBDT Circular No. 786 dated 7-2-2001 has clarified that deduction of tax at source will arise only of the payment of commission to non resident agent is chargeable to tax in India. In CBDT Circular No. 23 dated 23-7-1969 it has been clarified that where the non resident agent operates outside India, no part of his income arises in India.
(v) The DTAA between India and the concerned countries where the non resident agents are appointed also stipulates that the income or profits of an enterprise of a contracting state shall be taxable only in that state, unless the enterprise carries on business in the other contracting state through a permanent establishment situated therein. There is no material on record that the non resident agents had a permanent establishment in India. Therefore, as per DTAA also the commission payment are taxable only in the countries of the non resident commission agents.
(vi) When the commission payment was not chargeable to tax in India no disallowance could be made u/s 40(a)(i) even if no application has been made u/s 195 (2) or u/s 195(3).
The learned AR also relied upon the decisions of the ITAT, Hyderabad Bench in case of Dr. Reddy’s Laboratories (supra) and Hyderabad Industries Ltd. (supra).
9. We have heard rival submissions and perused material available on record. We have also gone through the written submissions filed by the learned AR of the assessee.
10. At the outset, certain provisions of the Act needs to be looked into section 40(a)(i) reads as under:-
“40. Not withstanding ……….
(a) In the case of any assessee –
(i) Any interest (not being interest on a loan issued for public subscription before the 1st day of April, 1938) royalty, fees for technical services or other sum chargeable under this Act, which is payable
A. Outside India –
B. In India to a non resident, not being a company or to a foreign company,
On which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid during the previous year, or in the subsequent year before the expiry of the time prescribed under sub-section (1) of section 200:”
11. The aforesaid clause makes it clear that the disallowance shall be made in case of any payment made which is chargeable under this Act and is payable outside India or in India to a non resident not being a company or to a foreign company on which tax is deductible at source. Therefore, the first condition required to be fulfilled is the payment must be chargeable under the Act, thereafter the question of deduction of tax will arise. Section 195(1) of the Act also prescribes that tax has to be deducted while making payment to non resident which is chargeable under the provisions of the Act. Therefore, the condition precedent for deduction of tax is the income must be chargeable under the provisions of the Act. In the facts of the present case, the agreement entered into by the assessee with foreign agents revealed that they have been appointed to act as sales agents outside India in their respective countries. The payment has also been made by DDs and sent to the respective non resident agents through courier. The AO has disallowed commission payment u/s 40(a)(i) by inferring that since the DDs were purchased in India and sent through courier, it has been done at the request of the non resident agents even though there is nothing in the agreement to come to such an inference.
12. As is evident from the assessment order, excepting this inference by the AO, there is nothing on record to suggest that the income is chargeable to tax in India or the payment has been received by the non resident agents in India or by any other person on their behalf. There is also no finding by the AO that the non resident agents have a permanent establishment in India or have any business connection in India, by virtue of which the payment of commission would have accrued or arose in India. The facts available on record clearly suggest that the non resident agents did not carry out any business operations in India and has acted as selling agents of the assessee outside India. Therefore, the commission earned by them for services rendered by them outside India cannot be considered as income chargeable to tax in India. That apart the submission of the learned AR that DTAA between India and concerned countries stipulates that the income of an enterprise of contracting state shall be taxable on in that state unless enterprise carries on business in the order contracting state through permanent establishments also requires consideration. The AO has not established the fact on record that any one of the non resident agents is carrying on business through a permanent establishments. Therefore, when the commission paid to the non residents are not chargeable to tax under the provisions of the Act, no deduction of tax is required to be made u/s 195(1) of the Act.
13. The reasoning of the AO that since the DDs have been purchased from banks in India and have been sent through courier, the payment of commission deemed to have been paid in India is also not acceptable. It is worth noting that earlier while the ITAT has set aside the assessment to the file of the AO, a clear direction was given to find out whether the payment has been made in India at the request of the foreign agents. We find that the AO has failed to bring any material on record to show that the payments were made to the non resident agents in India at the request of the foreign agents. The ITAT, Hyderabad Bench in case of Dr. Reddy’s Laboratories (supra), by relying upon Circular No. 786 dated 7-2-2000 of CBDT, held in the following manner:-
“In the case of Transmission Corporation (supra), the facts were that the assessee had entered into certain agreements with certain foreign parties for supply of equipments. Another set of contracts entered into were for assembling, erection, testing and commissioning of the equipment. Pursuant to these contracts, payments were made by the assessee to the foreign parties without deducting tax under s. 195 of the Act. The contention of the assessee was that s. 195 would be applicable only where the payment to the non resident is wholly income chargeable to tax as it provides that any person responsible for paying to a non resident ‘any sum chargeable under the provisions of this Act’, shall, at the time of payment, deduct income tax thereon at the rates in force. In other words, the contention was that when the payments made to the non resident were not entirely income, but a trading receipt, there is no question of deduction of income tax at the source as the section does not provide for it. To this contention, the Supreme Court answered that the assessee who made the payments to the non residents was under an obligation to deduct tax at source u/s 195 of the Act in respect of the sums paid to them under the contracts entered into. It further held that the obligation of the assessee to deduct tax u/s 195 is limited only to the appropriate proportion of income chargeable under the Act. Thus, it can be seen that the said judgment in fact helps the assessee. The second question answered by the Supreme Court can be understood to mean that the obligation of the assessee to deduct tax u/s 195 is not there when the payment made to the non resident does not contain any proportion of income therein. In our view, right from the beginning, not only on the basis of the circulars of the Board, but also on the basis of the decision of the Tribunal in its own case, the assessee firmly believed that no part of the income paid to the foreign agent was taxable in India. Therefore, there was no question of deducting any tax at source on any proportion of the payment made to the non-residents. Thus, the judgment in the case of Transmission Corporation (supra) does not advance the case of the department in the present appeal. Finally, it may be pertinent to note that Circular No. 786 dated 7-2-2000 i.e., the same has been issued after the judgment was rendered in the case of Transmission Corporation (supra) i.e., on 17-8-1999. The facts in the assessee’s case remain governed by the Board Circular and hence, in the final analysis, respectfully following the earlier order of the Tribunal in the assessee’s own case, we uphold the order of the CIT(A) deleting the disallowance.”
14. In the case of Hyderabad Industries Ltd. (supra) also ITAT, Hyderabad Bench held the similar view. In the present case, the AO has failed to bring any material on record on the basis of which it could be concluded that commission paid to foreign agents is chargeable to tax in India. Unless the income is chargeable to tax in India, then tax is not required to be deducted u/s 195(1). From the facts and materials available on record, no definite conclusion can be made that the commission paid to foreign agents is chargeable to tax in India. Therefore, the disallowance made u/s 40(a)(i) is not sustainable. Hence, there is no reason to interfere with the finding of the CIT(A) on this issue. The grounds raised by the revenue are rejected.
15. In the result, the appeal of the Revenue stands dismissed.
Order pronounced in the court on 06-7-2012.