Under the provisions of section 195 of the Act, any person responsible for making a payment to a non-resident, not being a company, or to a foreign company, any interest or any other sum chargeable under the provisions of the Act, shall at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by other mode, whichever is earlier, deduct income tax thereon at the rates in force. The assessee was therefore, asked to show-cause as to why there was no deduction of tax at source while making the payment to the N.R agents. The assessee submitted that it has paid agreed commission amount to the agents in foreign currency from India through normal banking channels viz., wire transfer, RTGS, DD/ Cheques etc., and that the agents were non-residents and since they were not having any PE in India and rendered the services outside India and the commission paid to them being their business income is not taxable in India under the provisions of section 9 of the IT Act, 1961. Therefore, there was no requirement to deduct tax u/s 195 of the Act
ITAT held that the business receipts of the foreign residents are not taxable in India since the agents have no PE in India and therefore, the assessee was not required to make TDS u/s 195 of the Act. Therefore, the assessee’s appeals for all the three A.Ys are allowed.
FULL TEXT OF THE ITAT JUDGEMENT
The appeals in ITA Nos. 11 & 12/Hyd/2017 are filed by the assessee against the orders of the CIT(A)-5, Hyderabad, dated 31/10/2016 for the assessment years 2012-13 and 2013-14 while ITA No.1273/Hyd/2017 is against the order of the CIT(A)-5, Hyderabad dated 20/06/2017 for the assessment year 2014-15. As the issue involved in all these appeals is common, all the three appeals were heard together and are disposed of by this common and consolidated order.
2. Brief facts of the case are that the assessee-company, engaged in the business of Testing and Analysis of Materials, Environmental Impact Assessment Studies, Clinical Studies and Pathological Services etc., filed its returns of income for the relevant assessment years.
3. For the AY 2012-13, the return was initially processed u/s 143(1) of the Act and subsequently the case was selected for scrutiny and the assessee was required to file the information called for. In response, the assessee filed the relevant information and on perusal of the same, the A.O. observed that the assessee-company had engaged some agents in foreign countries for following up with its customers for procurement of orders and recovery of the payments. It was observed that as per P & L Account for the A.Y. 2012-13, a sum of Rs. 1,14,33,012/- was debited under the head ‘commission to foreign agents’ but no tax was deducted at source. Observing that under the provisions of section 195 of the Act, any person responsible for making a payment to a non-resident, not being a company, or to a foreign company, any interest or any other sum chargeable under the provisions of the Act, shall at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by other mode, whichever is earlier, deduct income tax thereon at the rates in force. The assessee was therefore, asked to show-cause as to why there was no deduction of tax at source while making the payment to the N.R agents. The assessee submitted that it has paid agreed commission amount to the agents in foreign currency from India through normal banking channels viz., wire transfer, RTGS, DD/ Cheques etc., and that the agents were non-residents and since they were not having any PE in India and rendered the services outside India and the commission paid to them being their business income is not taxable in India under the provisions of section 9 of the IT Act, 1961. Therefore, there was no requirement to deduct tax u/s 195 of the Act and in support of this contention, the assessee placed reliance upon various case law.
4. The Assessing Officer, however, did not accept the assessee’s contention. The A.O. relied upon the decision of the Authority for Advance Rulings in the case of SKF Boilers and Driers Pvt Ltd in AAR Nos. 983 & 984 of 2010 reported in  343 ITR 0385 to hold that even though the agents have rendered services abroad in the form of soliciting the orders and the commission is also remitted to them abroad, it is clear that the income has arisen on account of commission payable to them abroad and therefore, is deemed to accrue or arise in India, and is taxable under the Act in view of the specific provision of section 5(2)(b) r.w.s 9(1)(i) of the Act. Thus, he held that the provisions of section 195 would apply and made the disallowance u/s 40(a)(ia) of the Act and brought it to tax.
5. Aggrieved, assessee preferred an appeal before the CIT(A), who confirmed the order of the A.O. and further held that the services rendered by the foreign agents are in the nature of “fees for technical services” and therefore, it is taxable even under the DTAA and hence, the assessee-company was liable to deduct tax u/s 195 of the Act. Against this order of the CIT(A), assessee is in appeal before us by raising the following grounds of appeal:
“1. On the facts and in the circumstances of the case, the order of the Ld. CIT(A) is erroneous, illegal and unsustainable on facts and in law.
2. The CIT(A) erred in sustaining the action of the A.O. in disallowing the claim of the appellant for the commission paid to the agents situated in foreign countries for the services rendered outside India.
3. The CIT(A) erred in not appreciating the submission of the appellant that provisions of section 9(1)of the Income Tax Act, 1961 read with Explanation thereto, apply to the facts of the present case. The CIT(A) failed to appreciate that since the services were rendered by foreign agents outside India couples with the fact that they are business receipts to them, there was no obligation to deduct taxes under section 195 of the Act.
4. The CIT(A) erred in invoking the provisions of section 9(1)(vi) of the Act which was not applicable to the facts of the present case. The findings given by the CIT(A) by invoking the definitions of Fee for Technical Services and Fee for Included Services are erroneous and unsustainable on facts and in law.
5. The appreciation of the agreements entered into by the appellant with its service providers by the CIT(A) are totally misplaced and unsustainable. The CIT(A) erred in selectively highlighting only few words in the agreements rather than looking into the factual gamut and the predominant services that were rendered to the appellant by its foreign agents.”
6. Learned Counsel for the Assessee, while reiterating the submissions made before the authorities below referred to one of the agreement between the agent and the assessee-company (which is placed at pages 32 to 43 of the paper book) according to which, the foreign agent was to provide sales, marketing, customer service and/or management support activities for the services as contracted by VIMTA and VIMTA desired to draw such services through PSN, upon the terms and conditions more specifically set-forth therein. Clause-2 of the agreement provides the services to be provided by PSN and Clause (d) of para 5 provides for carry forward of shortfall in payments till such time, the over payment can be set off against the commissions earned. Thus, according to the Learned Counsel for the Assessee, the services rendered outside India are not in the nature of fees for technical services as held by the CIT(A). He submitted that the CIT(A) has erroneously considered the services as “fees for technical services” and has not given any notice to the assessee for holding so. Therefore, the order of the A.O. and the order of the CIT(A) needs to be set aside.
7. Learned Departmental Representative, on the other hand, supported the orders of the authorities below and particularly para 14 of the order of the CIT(A) and submitted that the services rendered by the foreign agents are in the nature of “fees for technical services” and hence the assessee was liable to deduct TDS u/s 195 of the Act and the CIT (A)’s should be upheld.
8. Having regard to the rival contentions and the material on record, we find that the AO made the disallowance u/s 40(a)(ia) only on the ground that the assessee ought to have made the TDS u/s 195 of the Act since the income had accrued/arisen to the foreign agent in India. The AO has not held the payment to be “fees for technical services” or “royalty”. The CIT (A) has examined the nature of services provided by the foreign agent to the assessee and has come to the conclusion that it is “fees for technical services” and therefore, liable for TDS. Undoubtedly, the powers of the CIT (A) are co-terminus with that of the AO and therefore, the CIT (A) could have examined the facts of the case if the AO has not done so but before doing so, the CIT (A) is required to give a notice to the assessee. In the present case, the CIT (A) has not given any notice to the assessee but has only examined the issue on his own and has given a finding that the payment made by the assessee is “fee for technical services”. Therefore, the finding of the CIT (A) is against the principles of natural justice and has to be set aside on this ground alone.
9. On merits of the issue also, we find that the foreign agents have rendered the services outside India and have also received the payments outside India. The contention of the assessee that they are the business receipts of the foreign residents and the foreign agent do not have any PE in India and hence the income is not taxable in India has not been controverted by the AO. The AO has not disputed the contention of the assessee that the payments made by the assessee are the business receipts of the foreign agents. The only reason for the disallowance was that the income has accrued or arisen to the foreign agent in India and for coming to this conclusion the AO had relied upon the direction of AAR in the case of SKF Boilers & Driers Ltd. The ld Counsel for the assessee had placed reliance upon the decision of the Coordinate Bench of the Tribunal in the case of M/s. Anand Technologies Ltd in ITA No.1246/Hyd/2017 dated 20.07.2018 wherein the Tribunal has considered similar circumstances and also the above decision of the AAR and after considering the decisions of the jurisdictional High Court and also the Hon’ble Supreme Court, at Para 7 of its order, has held as under:
“7. We have considered the rival contentions and perused the documents placed on record along with the case law relied upon. There is no dispute that assessee has entered into an agreement for following up with the customers in USA and has agreed to pay commission to the non-resident agent for the services rendered there only. There is no dispute that the said company has not rendered any services in India. It is also not disputed that the said company has no permanent establishment in India. The only issue raised by AO is that since the commission has been paid from the bank account in India and has been accounted in the books of account of assessee that has to be considered as deemed to arise or accrue in India. Similar issue has been considered by the Co-ordinate Bench in the case of CIT Vs. Sri Aurobindo Impex Company, (supra), the Hon’ble Jurisdictional High Court has rendered the judgment following the principles laid down by the Hon’ble AP High Court in the case of Sri Ram Refrigeration Industries Vs. ITO [361 ITR 119] (AP). Further, the Hon’ble the High Court also held that following the principles laid down by the Hon’ble Supreme Court in the case of CIT Vs. Toshoku Ltd., [125 ITR 525] (SC) that making up of the entries in the books of account of assessee cannot be taken into be receipt actual or constructive by the non-resident sales agents. In view of that, prima-facie, the amounts paid from India does not establish that income has accrued or arisen in India as the services are not rendered in India at all and assessee has no business connection. This issue was considered by the Co- ordinate Bench in the case of DCIT Vs. Divi’s Laboratories Ltd., [131 ITD 271], wherein it was held as under:
“The main thrust in such a situation is whether the commission made to overseas agents, who are non-resident entities, and who render services only at such particular place, is assessable to tax. Sec. 195 very clearly speaks that unless the income is liable to be taxed in India, there is no obligation to deduct tax. Now, in order to determine whether the income could be deemed to be accrued or arisen In India, s. 9 is the basis. This section does not provide scope for taxing such payment because the basic criteria provided in the section is about genesis or accruing or arising in India, by virtue of connection with the property in India, control and management vested in India, which are not satisfied in the present cases. Under these circumstances, withdrawal of earlier circulars issued by the CBDT has no assistance to the Department, in any way, in disallowing such expenditure. It appears that an overseas agent of an Indian exporter operates in his own country and no part of his income arises in India and his commission is usually remitted directly to him by way of TT or posting of cheques/demand drafts in India and therefore the same is not received by him or on his behalf in India and such an overseas agent is not liable to income-tax in India on these commission payments. It is pertinent to note that s. 195 has to be read along with the charging ss. 4, 5 and 9. One should not read s. 195 to mean that the moment there is a remittance, the obligation to TDS automatically arises. If the contention of the Department is to be taken as correct, that any person making payment to a non-resident is necessarily required to deduct tax, then the consequence would be that the Department would be entitled to appropriate the monies deposited by the payer even if the sum paid is not chargeable to tax because there is no provision in the IT Act by which a payer can obtain refund. As per s. 237 r/w s. 199 only the recipient of the sum i.e., payee would seek a refund. In view of the above, hence, no tax is deductible under s. 195 on commission payments and consequently the expenditure on export commission payable to non-resident for services rendered outside India becomes allowable expenditure and the same is outside rigours of the s. 40a(ia). The requirement of services of the non- resident being rendered in India and being utilized in India is still valid, despite withdrawal of earlier circulars issued on this subject by CBDT.–CIT vs. Toshoku Ltd. (1980) 19 CTR (SC) 192 : (1980) 125 ITR 525 (SC) and GE India Technology Centre (P) Ltd. vs. CIT & Anr. (2010) 234 CTR (SC) 153 . (2010) 44 DTR (SC) 201 . (2010) 327 ITR 456 (SC) relied on”.
7.1. Similarly in the case of Euroflex Transmissions (India) Pvt. Ltd., Vs. ACIT in ITA No. 1773/Hyd/2014, dt. 01- 04-2015, on similar issue the Co-ordinate Bench has held as under:
“7. We have considered the submissions of the parties and perused the orders of the revenue authorities as well as other materials on record. We have also carefully applied our mind to the decisions cited at the bar. On a perusal of the assessment order, it is very much evident that AO has not disputed the fact that commission payments were made to non-resident agents who not only were carrying on their business activities outside India, but, the commission payments were also related to services provided by those agents outside India. It is also not disputed that none of the commission agents have any permanent establishment or permanent business place in India. AO has also not disputed the f act that commission amounts were remitted to non- residents directly outside India. However, AO has held that assessee is liable to deduct tax u/s 195(1) on the reasoning that as per the decisions of the AAR, referred to by him, income is deemed to accrue or arise in India when right to receive it comes into existence. Ld. CIT(A) has confirmed the view expressed by AO without assigning any reason of his own. It is to be noted that incase of Rajeev Malhotra(supra), AAR has come to its conclusion by referring to the provisions contained u/s 6 and 9 of the IT Act. However, a careful reading of section 9of the Act would make it clear that under Explanation 1(a) to section 9(1), it has been provided that in case of a business of which all the operations are not carried out in India, the income of such business only relating to such part of the income as is reasonably attributable to the operations carried out in India shall be deemed to accrue or arise in India. In the present case, AO has not brought any material on record to establish that non-resident agents have carried out any part of their business in India.
8. Moreover,section 195(1)envisages that tax is to be deducted at source on income which is chargeable under the provisions of IT Act. The Hon’ble Supreme Court while interpreting the expression ‘chargeable under the provisions of this Act’ as employed u/s 195(1) of the Act has held in case of GE India Technology Centre P. Ltd. (supra) that the said expression would mean that the remittance has got to be of a trading receipt, the whole or part of which is liable to tax in India. However, if the payments made to non-residents are not chargeable to tax under the provisions of IT Act, then, the provisions of section 195 would not apply. The Hon’ble Supreme Court further observed that if the scope of section 195 is enlarged to that extent, then, it would result in a situation where, even though, the income will have no territorial nexus with India or is not chargeable in India, the Govt. would nonetheless collect taxes. In the present case, on a perusal of the assessment order or the order of ld. CIT(A), we do not find any conclusive finding given by the authorities concerned that the payments made to non-residents are chargeable to tax under the IT Act. Applying the principles laid down by the Hon’ble Supreme Court as aforesaid, it is to be held that the provisions of section 195would not be applicable to payments made by assessee to non-resident agents. This view is also supported by the following decisions:
1. CIT Vs. Model Exims Kanpur,  358 ITR 72 (All.)
2. CIT Vs. Faizan Shoes Pvt. Ltd.,  367 ITR 155 (Mad.)
9. Further, the coordinate bench while examining identical nature of dispute in case of Arobindo Pharma Ltd. (supra) held in the following manner:
25. As far as the amount paid as sales commission is concerned, this issue has already been decided by the Coordinate Bench in assessee’s own case for the A.Y. 2002-2003 and 2004-2005 in ITA.No.415 & 999/Hyd/2007 by order dated 25.06.2010. the Coordinate Bench has held as under :
“2. . . .. . We find that as per Circular 786 dated 17.2.2000, commission paid by the assessee company directly to non-resident agents for rendering services abroad are not liable for deduction of TDS under section 195 of the Act. Accordingly, the provisions of section 40(a)(ia) of the Act are not applicable. The case law relied on by the learned Departmental Representative in the case of Transmission Corporation of A.P. Limited reported in 239 ITR 587 (SC) and the decision of this Tribunal in the case of Cheminor Drugs vs. ITO is not applicable to the facts of the case under consideration, as in this case, the assessee made the payment directly to the non-resident agents for rendering services abroad. In view of the above, we do not see any infirmity in the order of the CIT(A) on this issue and the same is upheld.”
7.2. The ratio laid down by the Co-ordinate Benches squarely applies to the facts of the present case and respectfully following the principles laid down in the judicial proceedings referred to herein above, we therefore hold that the provisions of Section 195 would not be applicable to the commission payments made by assessee to non-resident agent who has not done any service in India and as such income is not chargeable to tax under the provisions of the Act as there is no requirement to do any TDS u/s. 195, the disallowance made u/s. 40(a)(i) of the Act is also not survive.
7.3. We are surprised to note that Ld.CIT(A) without understanding the international law has simply held that a foreign agent and the Indian company are sister concerns and accordingly the amounts are taxable. Even if one were to consider that other company is a sister concern of assessee, how the provisions of Section 195 or Section 5 and Section 9 are applicable has not been discussed by the Ld.CIT(A) at all.
Moreover, the provisions of DTAA between India and USA also gives the right to tax the amount in the hands of foreign assessee if the same is considered as business income when there is no permanent establishment in India. Since the non- resident has no permanent establishment in India, the question of taxing the amount does not arise as the provisions of DTAA which over rides the provisions of Income Tax Act. In view of that, the order of CIT(A) cannot be upheld. Similar view was also expressed by the Co-ordinate Bench in the case of Dy.CIT Vs. M/s. Linkwell Telesystems (P.) Ltd., wherein also commission was paid to non-residents for the services rendered abroad and was held not taxable. In view of that, we cannot uphold the orders of AO disallowing the amount u/s. 40(a)(i). Grounds raised by assessee are allowed”.
10. Respectfully following the same, we hold that the business receipts of the foreign residents are not taxable in India since the agents have no PE in India and therefore, the assessee was not required to make TDS u/s 195 of the Act. Therefore, the assessee’s appeals for all the three A.Ys are allowed.
11. In the result, assessee’s appeals are allowed.
Pronounced in the open Court on 24th April, 2019.