Case Law Details

Case Name : ACIT Vs. Nuova Shoes (ITAT Agra)
Appeal Number : IT Appeal No. 435 (Agra) of 2015
Date of Judgement/Order : 28/09/2017
Related Assessment Year : 2010-11
Courts : All ITAT (5464) ITAT Agra (88)

Asstt. CIT Vs. Nuova Shoes (ITAT Agra)

The assessing officer completed assessments under section 143(3) for the assessment years 2011-12 and 2012-13 wherein the learned assessing officer has not made any disallowance in respect of the payment of commission to the foreign agents residing in the country, with which India has entered into DTAA.

Apropos assessing officer’s contention that the CBDT, vide Circular No. 7, dt. 22-10-2009, had withdrawn its Circulars Nos. 23, dt. 23-7-1969, 163, dt. 29-5-1975 and 786, dt. 7-2-2000, which were based on Circular No. 23; that the Circular No. 23 was issued in the context of section 9 of the Act which deems certain incomes to accrue or arise in India for non-residents; and that in view of this, the assessee should have deducted tax at source under section 195 of the Act on payments of commission made to non-residents agents with effect from 22-10-2009, we find that the assessing officer has not made out any case that whether the issue of Circular No. 7 of 2009 by CBDT by which the earlier circulars were withdrawn, will make any difference as to bringing the commission payments within the ambit of tax as he has not adverted to the admitted position that there exists no business connection or permanent establishment of such agents in India.

 It is not disputed that that the withdrawal of the Circulars No. 23 and 786 has been made on 22-10-2009 vide CBDT Circular No. 7 of 2009 and mere withdrawal of the circular does not negate the principles of income deemed to accrue or arise in India or outside India. The CBDT has not stated that any part of the circulars is contrary to law or that the circulars were wrongly issued or that the law has undergone changes holding their withdrawal. Thus, in respect of cases, which directly follow with the situations covered by the circulars, the liability to tax should continue to be in accordance with section 9 of the Act and its intent. The relevant sections, namely section 5(2) and section 9 of the Income Tax Act, 1961 not having undergone any change in this regard, the clarification in Circular No. 23 still prevails even after the withdrawal. No tax is therefore deductible under section 195 and consequently, the expenditure on export commission payable to a non-resident for services rendered outside India is not liable for withholding tax.

FULL TEXT OF THE ITAT JUDGMENT

This is department’s appeal against the order dated 31-3-2015 of the learned Commissioner (Appeals)-I, Agra for the assessment year 2010-11. The effective grounds raised by the Revenue read as under :–

“1. That the learned Commissioner (Appeals)-1, Agra has erred in law and on facts in deleting the addition of Rs. 63,08,727 made under section 40(a)(i) on account of non-deduction of tax on payments of commission to non-resident/foreign commission agents ignoring the facts that commission paid to foreign commission agents is deemed to accrue or arise in India, which required deduction of tax as per section 195 of the Income Tax Act, 1961.

2. That the learned Commissioner (Appeals)-1, Agra has erred in law and facts in deleting the addition of Rs. 63,08,727 by ignoring the law as laid down as per section 9(1)(i) which clearly comes in the nature of payment by the assessee to non-residents.”

2. The brief facts of the case are that the assessee who is in the trade, manufacturing and exports of shoes filed its return of income for the year under consideration at income of Rs. 2,31,93,300; that during the assessment stage, the assessing officer while going through the assessee’s claim of commission of Rs. 63,08,727 as paid by the assessee to its foreign agents found that the assessee did not deduct the tax at source (TDS) on such payments; that the assessing officer took a view that such payments in terms of sections 5(2) and 9(1)(i) of the Act were deemed to be accruing or arising in India, therefore the assessee was bound to deduct the tax at source (TDS) on such payments; that, therefore, while considering that the assessee did not deduct tax at source on such payments, the assessing officer, disallowed the said payments under section 40(a)(i) of the Act and accordingly addition of the amount of Rs. 63,08,727 was made towards the assessee’s income; that while making the said addition, the assessing officer took a view that CBDT has issued Circular No. 7, dt. 22-10-2009 by which earlier Circular No. 23, dt. 23-7-1969, along with Circular No. 163, dt. 29-5-1975 and Circular No. 786, dt. 7-2-2000 which were based on Circular No. 23, have been withdrawn; that the Circular No. 23 was issued in the context of section 9 of the Income Tax Act which deems certain income to accrue or arise in India for non-residents; that thus, according to the assessing officer, the assessee should have deducted tax at source; that the assessing officer further held that post withdrawal of Circular No. 786 the income arising to foreign agents on account of export commission falls under section 5(2)(b) of the Act as the income had accrued in India when the right to receive the income became vested; that as per the assessing officer, the position had entirely changed post 22-10-2009, i.e., after the withdrawal of Circular No. 786 and other relevant Circulars by the CBDT; that to further strengthen his view the assessing officer referred to a Ruling by the Authority for Advance Ruling in the case of S.K.F. Boilers & Driers (P.) Ltd. in which case, it was held that withholding of tax is mandatory under section 195 of the Income Tax Act on export commission paid to a non-resident agent, since commission is deemed to accrue or arise in India; and that the assessing officer, thus, held that provisions of section 195 are applicable in respect of payments of Commission with effect from 12-10-2009 to 31-3-2010, and on the basis of which the amount of Rs. 63,08,727 was disallowed under section 40(a)(i) of the Act by him and added to the income of the assessee.

3. The assessing officer while making the said disallowance of Rs. 63,08,727, further observed as under in the assessment order :–

“3.1 The reply of the assessee is considered. It is clear that Circular No. 786 has been withdrawn, therefore, the income arising to the foreign agents on account of export commission falls under section 5(2)(b) of the Income Tax Act as the income has accrued in India when the right to receive the income became vested. Section 5(2)(b) of the Income Tax Act deals with the scope of the total income whereby the income of a non-resident includes all income from whatever sources derives, which accrues or arises or is deemed to accrue or arise in India during such previous year. Under section 9(1)(i) of the Income Tax Act, income accruing or arising directly or indirectly through or from any business connection in India or source of income in India shall be deemed to accrue or arise in India. The words accrue or arise occurring in section 5 of the Act have more or less a synonymous sense and income is set to accrue or arise when the right to receive it comes in existence. No doubt the agents render services abroad and have solicited orders, but the right to receive commission arises in India when the order is executed by the commission agent in India. The fact that the agents have rendered services abroad in the form of soliciting the orders and the commission is remitted to them abroad in lieu of services rendered for execution of business orders in India.

Similar view has been taken by the Authority for Advance Ruling in the case of S.K.F. Boilers and Driers Pvt. Ltd. In this case it has been held that withholding of tax is mandatory under section 195 of the Income Tax Act on export commission paid to a non-resident agent, since commission is deemed to accrue or arise in India.

In view of the legal position mentioned above the reply of the assessee has no force, therefore, same is rejected. The case laws mentioned by the assessee in its reply are not applicable, as the position is entirely changed with effect from 22-10-2009, i.e., after withdrawal of Circular No. 786 and other relevant circulars issued by the CBDT.

Assessee has paid commission amounting to Rs. 1,09,48,085 to a non-resident which is not in dispute. The assessee has not deducted TDS on such payments is also a fact. Further, the assessee has argued that foreign agents are not resident in India and they have not permanent establishment in India too. The assessee has not argued that foreign agents are availing the benefit of tax treaty. Complete details and particulars in respect of double taxation relief have been furnished with documentary evidence, therefore, no benefit in respect of DTAA is considered at this stage.

Considering the totality of the case I hold that provisions of section 195 of the Act are clearly applicable in this case, therefore, commission paid/payable with effect from 22-10-2009 to 31-3-2010, amounting to Rs. 63,08,727 is disallowed under section 40(a)(i) of the Income Tax Act and added to the income of the assessee.”

4. By virtue of the impugned order, the learned Commissioner (Appeals) allowed the assessee’s appeal.

5. The learned DR has contended that the learned Commissioner (Appeals) has erred in law and on facts in deleting the addition of Rs. 63,08,727 made under section 40(a)(i) on account of non-deduction of tax on payments of commission to non-resident/foreign commission agents ignoring the facts that commission paid to foreign commission agents is deemed to accrue or arise in India, which required deduction of tax as per section 195 of the Income Tax Act, 1961; and that the learned Commissioner (Appeals) was not justified in deleting the addition of Rs. 63,08,727 by ignoring the law as laid down as per section 9(1)(i) which clearly comes in the nature of payment by the assessee to non-residents. Numerous case laws have been relied on which shall be dealt with in due course.

6. The learned Counsel for the assessee has placed reliance on the impugned order. It has further been submitted that regarding the commission paid to agents (as per chart filed), prior to withdrawal of CBDT Circulars Nos. 23 and 786, no disallowance could be made of the commission paid subsequent to such withdrawals; that in GE India Technology Centre (P.) Ltd. v. CIT (2010) 327 ITR 456 (SC), it was held that liability to deduct tax at source under section 195 of the Income Tax Act get triggered only if there is income chargeable to tax in India and that a similar disallowance made for assessment year 2011-12, stands deleted by the learned Commissioner (Appeals), vide order (APB 76-86) dated 30-6-2016, against which, no appeal was preferred by the department. The learned Counsel for the assessee relied on certain case laws, which shall be dealt with presently.

7. We have heard the parties and have perused the material on record.

8. In the impugned order, the learned Commissioner (Appeals) has observed as follows:–

’10. Thus from a perusal of the facts of this appeal, submissions as made coupled with the judicial pronouncements that has been relied upon by the learned AR, it is thus the appellant’s contention that the withdrawal of the circular should not per se change or alter the provisions of relevant sections as these exist on the statute. Once the provisions of section 5(2) and section 9(1)(i) are considered in the light of the fact that these agents do not have any business connection or permanent establishment in India, therefore there could be no occasion to question the assessee’s action in not deducting the tax at source as the provision of section 195 were not attracted. As observed from assessing officer’s action, it may be mentioned here that the assessing officer has subjected the payment of commission to TDS provisions only after the cut off date of 22-9-2009, the date on which the Circular No. 7 of 2009 got operational, meaning thereby he has disallowed payments of commission for the period 22-9-2009 to 22-3-2010 (sic), and for the period prior to it he has allowed the appellant’s claim in respect of payments made before the said date and has thus accepted appellant’s claim of such payments considering the same to be complying to the section 5(2) and section 9 of the Act. Therefore, while considering so, I find that the issue as emerging and requiring adjudication therefore is whether the appellant is liable to deduct tax at source (TDS) on the payments made to non-resident agent(s) in a situation which is subsequent to the withdrawal of the said circular and whether the disallowance made in respect of the payment made to foreign commission agents amounting to Rs. 63,08,727 under section 40(a)(i) in view of provisions of section 195 of the Act is called for or not. Further, two important aspects that need further elucidation in the appellant’s case, i.e., whether there exists any business connection of the agents or whether such agents do maintain any permanent establishment in India or not. These are important questions for consideration as the assessing officer has invoked the provisions of section 5(2) and section 9(1)(i) of the Act, however he has not dwelt beyond merely mentioning these circular without bringing nay thing on record about business connection or permanent establishment of such agents in India. As per the facts of the case, the appellant is undoubtedly engaged in the business of manufacture and export of footwear to outside India and has incurred expenditure by way of payment of commission to foreign commission agents in respect of the export orders procured from them for the sale of footwear manufactured by it. The assessing officer in his order has also not disputed this fact the foreign agents are located outside India and have no permanent establishment in India. In the given circumstance, the assessing officer while invoking provisions of section 40(a)(i) of the Act and disallowing the payment of commission to foreign commission agent has taken a view that since the Board has withdrawn Circular No. 786, dt. 7-2-2000 which deals with payment of export commission to non-resident agents, the income by way of commission earned by the foreign commission agent accrues and arises in India, when the right to receive the income became vested and hence, the assessee was under obligation to withhold tax under section 195 of the Act.

11. As regards the issue of the withdrawal of the circulars which is at question in the present appeal, it is relevant to refer here to a decision of the Hon’ble ITAT, Hyderabad Bench in the case of Dy. CIT v. Divi’s Laboratories Ltd. (2011) 131 ITD 271 (Hyd.), wherein the Hon’ble ITAT Hyderabad while considering the impact of said Circular No. 7 of 2009, has held as under–

8. We have considered the submissions of both the parties and perused the relevant material available on record. The moot question that arises out of these appeals is whether the payment of commission made to the overseas agents without deduction of tax is attracted disallowance under section 40(a)(ia) of the Act or not. Whether the payment in dispute made by way of cheque or demand draft by posting the same in India would amount to payment in India and consequently whether mere payment would be said to arise or accrue in India or not?. First we will take up the issue whether the payment of commission to overseas agents with out deduction of tax is attracted disallowance under section 40(a)(ia) of the Act or not. We find that the CBDT by its recent Circular No. 7, dt. 22-10-2009 withdrawn its earlier Circular Nos. 23, dt. 23-7-2009, 163, dt. 29-5-1975 and 786, dt. 7-2-2000. The earlier circulars issued by the CBDT have clearly demonstrated the illustrations to explain that such commission payments can be paid without deduction of tax. Thus, 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. Section 195 of the Act 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, section 9 of the Act is the basis. This section, in our opinion, 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 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. This view is fortified by the judgment of Apex Court in the case of CIT v. Toshoku Ltd. (1980) 125 ITR 525 (SC).

9. It is pertinent to note that the section 195 of the Act has to be read along with the charging sections 4, 5 and 9 of the Act. One should not read section 195 to mean that the moment there is a remittance; the obligation to deduct TDS automatically arises. If we were to accept such contention, it would mean that on mere payment in India, income would be said to arise or accrue in India. These are the observations made in the judgment of Apex Court in the case of GE India v. CIT (2010) 327 ITR 456 (SC), relied on by the learned counsel for the assessee, for the proposition that provisions relating to deduction of tax applies only to those sums which are chargeable to tax under the Income Tax Act. If the contentions of the department, are 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 Income Tax Act by which a payer can obtain refund. As per section 237 read with section 199 of the Act implies that only the recipient of the sum, i.e., payee would seek a refund. In view of the above, hence, no tax is deductible under section 195 of the Act 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 rigors of the section 40(a)(ia) of the Act.

11.1 While going through the afore cited decision in the case of Divi’s Laboratories Ltd. (supra), wherein the Hon’ble ITAT Hyderabad has duly interpreted the import and impact of the withdrawal of the circular, it is therefore observed that the said decision is squarely covering the issue as involved in the present appeal, and on the basis of the same it is further observed that post withdrawal of the CBDT Circular, the provisions of section 5(2) and section 9 has not undergone any change.

12. However, before proceeding further, it may be worthwhile to refer to the provisions of section 9(1)(i) of the Act, and to see that commission payments could be subject to tax by the assessing officer or not. The assessing officer in order to bring said commission payments within the ambit of TDS provisions has invoked section 9(1)(i) of the Act. The relevant extract of section 9(1)(i) is reproduced hereunder :–

“9. (1) The following incomes shall be deemed to accrue or arise in India :–

(i) all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situate in India.

Explanation 1.–For the purposes of this clause —

(a) in the case of a business of which all the operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India;

(b) in the case of a non-resident, no income shall be deemed to accrue or arise in India to him through or from operations which are confined to the purchase of goods in India for the purpose of export;

***                                                            ***                                                      ***

(c) in the case of a non-resident, being a person engaged in the business of running a news agency or of publishing newspapers, magazines or journals, no income shall be deemed to accrue or arise in India to him through or from activities which are confined to the collection of news and views in India for transmission out of India;

(d) in the case of a non-resident, being —

(1) an individual who is not a citizen of India; or

(2) a firm which does not have any partner who is a citizen of India or who is resident in India; or

(3) a company which does not have any shareholder who is a citizen of India or who is resident in India,

no income shall be deemed to accrue or arise in India to such individual, firm or company through or from operations which are confined to the shooting of any cinematograph film in India;

Explanation 2.–For the removal of doubts, it is hereby declared that “business connection” shall include any business activity carried out through a person who, acting on behalf of the non-resident, —

(a) has and habitually exercises in India, an authority to conclude contracts on behalf of the non-resident, unless his activities are limited to the purchase of goods or merchandise for the non-resident; or

(b) has no such authority, but habitually maintains in India a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the non-resident; or

(c) habitually secures orders in India, mainly or wholly for the non-resident or for that non-resident and other non-residents controlling, controlled by, or subject to the same common control, as that non-resident:

Provided that such business connection shall not include any business activity carried out through a broker, general commission agent or any other agent having an independent status, if such broker, general commission agent or any other agent having an independent status is acting in the ordinary course of his business:

Provided further that where such broker, general commission agent or any other agent works mainly or wholly on behalf of a non-resident (hereafter in this proviso referred to as the principal non-resident) or on behalf of such non-resident and other non-residents which are controlled by the principal non-resident or have a controlling interest in the principal non-resident or are subject to the same common control as the principal non-resident, he shall not be deemed to be a broker, general commission agent or an agent of an independent status.”

12.2 As regards the import of section 9(1)(i) of the Act in terms of business connection, the Hon’ble Delhi High Court in the case of CIT v. EON Technology (P.) Ltd. (2011) 343 ITR 366 (Delhi) while dealing with payment of commission by the said assessee company to its parent company, i.e., ETUK of UK which was located outside India has held that the commission payment to its British parent/holding company ETUK could not said to have been accrued to ETUK in India and therefore, the assessee was not liable to deduct tax at source from payment of commission to ETUK. The head note of order is reproduced hereunder :–

“Section 9 of the Income Tax Act, 1961–Income–Deemed to accrue or arise in India–Assessment year 2007-08–Assessee-company was engaged in business of development and export of software–During relevant assessment year, it had paid commission to its British parent/holding company ETUK on sales and amounts realized on export contracts procured by ETUK for assessee–Assessing officer held that commission income earned by ETUK had accrued in India or was deemed to accrue in India and, therefore, assessee was liable to deduct tax at source there from and as there was failure, said expenditure should be disallowed under section 40(a)(ia)–Whether when ETUK was not rendering any service or performing any activity in India itself, commission income could be said to have accrued, arisen to or received by ETUK in India merely because it was recorded in books of assessee in India or was paid by assessee situated in India–Held, no–Whether for applying section 9 assessing officer was required to examine whether said commission income was accruing or arising directly or indirectly from any business connection in India–Held, yes–Whether since facts found by assessing officer did not make out a case of business connection as stipulated in section 9(1)(i), commission income could not be said to have accrued to ETUK in India and, therefore, assessee was not liable to deduct tax at source from payment of commission to ETUK- Held, yes [In favour of assessee].”

13. In any case, there is no dispute that the agents being located outside India and not resident of India were canvassing sales for the assessee for customers abroad. It is an admitted position by the assessing officer himself that the agents are neither resident in India nor do they have any permanent establishment in India. Therefore it is not a case where the non-resident agents are carrying on any business activity in India. Rather, it is the appellant who has engaged the services of foreign agents outside India on pure commercial and business terms for its sales outside India and also to pursue the payments to be made by the purchasers as located abroad. Further, as observed earlier also, the assessing officer has not been able to dwell further beyond just mentioning and invoking the provisions just of section 9(1)(i), whereas unless and until the vital ingredients like permanent establishment or business connection are established by the assessing officer, the mere reference and invoking the provisions of sections 5(2)(b) or section 9(1)(i) may not suffice to make such a disallowance.

14. The judicial decisions that have evolved has further clarified the issue in its correct perspective, notable mention out of which may be made of the decision of the Hon’ble Apex Court as rendered in the case of CIT v. Toshoku Ltd. (1980) 125 ITR 525 (SC), wherein the Hon’ble Apex Court while dealing with the twin aspects of the situation in the case of the assessee before it, as to what was the effect of the entries in the books of account of the Indian assessee which had resulted in debit and credit entries on account of commission and secondly, whether procurement of export orders by the foreign companies for the Indian company had resulted in a business connection, has opined as under —

“It cannot be said that the making of the book entries in the books of the statutory agent amounted to receipt by the assessees who were non-residents as the amounts so credited in their favour were not at their disposal or control. It is not possible to hold that the non-resident assessees in this case either received or can be deemed to have received the sums in question when their accounts with the statutory agent were credited, since a credit balance, without more, only represents a debt and a mere book entry in the debtor’s own books does not constitute payment which will secure discharge from the debt. They cannot, therefore, be charged to tax on the basis of receipt of income actual or constructive in the taxable territories during the relevant accounting period.

In the instant case, the non-resident assessees did not carry on any business operations in the taxable territories. They acted as selling agents outside India. The receipt in India of the sale proceeds of tobacco remitted or caused to be remitted by the purchasers from abroad does not amount to an operation carried out by the assessees in India as contemplated by clause (a) of the Explanation to section 9(1)(i) of the Act. The commission amounts which were earned by the non-resident assessees for services rendered outside India cannot, therefore, be deemed to be incomes which have either accrued or arisen in India. The High Court was, therefore, right in answering the question against the department.”

14.2 Further, subsequent to and on the lines of the aforesaid decision of the Hon’ble Apex Court, the issue of the appellant is also covered by the decision of the Hon’ble Madras High Court in the case of Faizan Shoes (P.) Ltd. (supra) wherein also there was a similar issue of export commission being paid by a shoe manufacturer outside the India without deducting TDS thereon. The Hon’ble High Court has held as under :–

“10. While dealing with section 9(1) of the Act, the Supreme Court in CIT v. Toshoku Ltd. (1980) 125 ITR 525 (SC) on considering a transaction where tobacco was exported to Japan and France and sold through non-resident assessees who were paid commission, held as under :–

The second aspect of the same question is whether the commission amounts credited in the books of the statutory agent can be treated as incomes accrued, arisen, or deemed to have accrued or arisen in India to the non-resident assessees during the relevant year. This takes us to section 9 of the Act. It is urged that the commission amounts should be treated as incomes deemed to have accrued or arisen in India as they, according to the department, had either accrued or arisen through and from the business connection in India that existed between the non-resident assessees and the statutory agent. This contention overlooks the effect of clause (a) of the Explanation to clause (i) of sub-section (1) of section 9 of the Act which provides that in the case of a business of which all the operations are not carried out in India, the income of the business deemed under that clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India. If all such operations are carried out in India, the entire income accruing therefrom shall be deemed to have accrued in India. If however, all the operations are not carried out in the taxable territories, the profits and gains of business deemed to accrue in India through and from business connection in India shall be only such profits and gains as are reasonably attributable to that part of the operations carried out in the taxable territories. If no operations of business are carried out in the taxable territories, it follows that the income accruing or arising abroad through or from any business connection in India cannot be deemed to accrue or arise in India (See CIT v. R.D. Aggarwal & Co. (1965) 56 ITR 20 (SC) and Carborandum Co. v. CIT (1977) 108 ITR 335 (SC) which are decided on the basis of section 42 of the Indian Income Tax Act, 1922, which corresponds to section 9(1)(i) of the Act).

In the instant case, the non-resident assessees did not carry on any business operations in the taxable territories. They acted as selling agents outside India. The receipt in India of the sale proceeds of tobacco remitted or caused to be remitted by the purchasers from abroad does not amount to an operation carried out by the assessees in India as contemplated by clause (a) of the Explanation to section 9(1)(i) of the Act. The commission amounts which were earned by the non-resident assessees for services rendered outside India cannot, therefore, be deemed to be incomes which have either accrued or arisen in India. The High Court was, therefore, right in answering the question against the department.

11. The facts of the present case are akin to the facts of the decision in Toshoku Limited case, referred supra. In the instant case also the assessee engaged the services of non-resident agent to procure export orders and paid commission. That apart, the Commissioner of Income (Appeals) as well as the Tribunal have correctly applied the principle laid down in GE India Technology Cen. (P.) Ltd. case, referred supra, to hold that the assessee is not liable to deduct tax at source when the non-resident agent provides services outside India on payment of commission.”

15. Respectfully following the above decisions, I agree with the learned AR that post withdrawal of the CBDT Circular, the provisions of section 5(2) and section 9 has not undergone any change. There is nothing on record to establish that the non-resident (foreign) commission agents have rendered services or performed any activity in India, and merely because the commission is recorded in the books of the assessee appellant in India or paid by the appellant situated in India, does not make it a case of business connection as stipulated in section 9(1)(i) of the Income Tax Act. Therefore, in view of the foregoing, it is thus found that the provision of section 9(1)(i) are not applicable in the appellant’s case.

16. As far as the assessing officer’s reliance in the AAR’s decision in SKF Boilers is considered, with respect, it is observed that the same is not found to be applicable as the said ruling was in respect of an entity based in Pakistan with which India did not have any treaty or DTAA. Whereas in the present appeal where the appellant has made its submission with regard to the treat provisions as existing vide the DTAAs entered into by India with the countries i.e., Italy, USA and UK wherein the commission agents reside, I find that while the essential feature of the commission payments being made on commercial or business terms, therefore, per force of the relevant covenant/Articles of such treaties, no adverse inference can be drawn so as to deny the appellant’s claim under the treaty provisions. More so there is another ruling given by the Hon’ble AAR in Spahi Projects Pvt. Ltd., dt. 29-7-2009 in AAR No. 802 of 2009 which has not been considered by the assessing officer, and the same is directly on the issue of commission payments to foreign agents and is found to be squarely applicable to the facts of the present appeal.

17. With regard to the above issue, It is also pertinent to note that in the assessing officer while completing the assessment in the appellant’s own case for assessment year 2012-13 in the appellant’s own case has accepted assessee’s claim of commission payments made to foreign agents. As mentioned earlier though, the learned AR of the appellant while making its submissions against the impugned addition, has also referred to the existing DTAAs as entered into by India with Italy, USA and UK, and on the basis of which it is asserted that in case of non-resident commission agent residing in foreign countries with whom India has entered into DTAAs, the assessee was under no obligation to deduct tax at source when the non-resident commission agent provides services outside India on payment of commission. In this regard, the Hon’ble Supreme Court of India in the case of GE India Technology Center (P.) Ltd. v. CIT (2010) 327 ITR 456 (SC) has held as under —

Where the income is not chargeable to tax, there is no question of deducting tax at source. In the instant case, the commission paid by the assessee (appellant) to his agent is not chargeable to tax in India. Therefore, the assessee was not liable to deduct tax at source on the said payments. Since, the income of foreign agents is outside the purview of section 9, consequently section 195 of the Act will not come into play.

18. In view of the foregoing it is thus evident that it is not the case of the assessing officer that the foreign agents are carrying on any business activity in India. Rather, on the contrary, it is the appellant who has engaged the services of non-resident agents outside India on pure commercial and business terms to propagate and co-ordinate its sales outside Indian Territory. Thus, it is unambiguously evident that the provisions of sections 5(2)(b), section 9(1)(i) or section 195 are not attracted in this case.

19. In view of the above and while going through the different aspects of the issue as that is involved in the present appeal and after discussing the position of law, it is an undisputed position in this case that the foreign commission agents to whom the appellant has made payments for commission on sales, do not have a business connection or permanent establishment in India. It is also observed that the assessing officer has not made out any case that whether the issue of Circular No. 7 of 2009 by CBDT by which the earlier circulars were withdrawn, will make any difference as to bringing the commission payments within the ambit of tax as he has not adverted to the admitted position that there exists no business connection or permanent establishment of such agents in India. Rather, per the force of judicial decisions notably as rendered by the Hon’ble Apex Court in Toshoku Ltd. (supra) and the Hon’ble Madras High Court in the case of Faizan Shoes and by Hon’ble ITAT Hyderabad in the case of Divi’s Laboratories Ltd. (supra) it is duly shown that without the existence of business connection or permanent establishment, and/or with the withdrawal of circular, the provision of section 9(1)(i) or section 5(2) have not undergone any change, as a result of which the commission income of these agents does not get taxable in India. Therefore, due to the non-existence of any permanent establishment or any business connection which is indeed a pre-requisite for holding that the income does accrue or arise in India, and on that basis without correctly invoking the provisions of section 5(2) or 9(1)(i) of the Act, the appellant cannot be asked to deduct tax at source either under the Income Tax Act or the treaty provisions as per the existing DTAAs as submitted by the appellant. Therefore in view of the above, I find that the appellant is correct in its approach in not deducting tax at source on the payment of commission made to foreign commission agents. While finding that the appellant was not liable to deduct tax at source on the payments of commission made to foreign commission agents under section 195 of the Act, therefore, there is no justification that disallowance under section 40(a)(i) of the Act could be made by the assessing officer. In view of the same, therefore, the addition of Rs. 63,08,727 as made by the assessing officer on account of disallowance made under section 40(a)(i) of the Act, is hereby deleted. Accordingly, Grounds No. 2, 3, 4 & 7 are allowed.’

9. The assessee is in the business of manufacture and export of footwear to various countries. It paid commission to non-resident commission agents for services rendered outside India. It claimed this payment as an expenditure.

10. The assessing officer observed that on perusal of books of account of the assessee, it is seen that assessee has paid commission to a non-resident agent on exported goods amounting to Rs. 1,09,48,085 during the year; that the Central Board of Direct Taxes has issued the Circular No. 7, dt. 22-10-2009 withdrawing its Circular No. 23, dt. 23-7-1969, Circular No. 163, dt. 29-5-1975 and Circular No. 786, dt. 7-2-2000, which were based on Circular No. 23; that the Circular No. 23 was issued in the context of section 9 of the Income Tax Act, 1961, which deems certain incomes to accrue or arise in India for non-residents; and that in view of this, assessee should have deducted tax at source under section 195 of the Income Tax Act on payments of commission made to non-residents agents with effect from 22-10-2009. The assessee was asked to explain the commission paid to non-resident in the light of abovementioned Circulars. The assessee was also asked as to why it has not deducted tax at source under section 195 of the Income Tax Act on payments made on account of commission to non-resident agents.

11. The assessee replied that the non-resident agent has carried out all his activities outside India, did not render any service in India and did not have Permanent Establishment (PE) in India, hence, no part of his income accrue or arise in India; that such payments were therefore held to be not taxable in India; that the withdrawal of the Circular Nos. 23 and 786 has been made on 22-10-2009 vide CBDT Circular No. 7 of 2009 and mere withdrawal of the circular does not negate the principles of income deemed to accrue or arise in India or outside India; that the CBDT has not stated that any part of the circulars is contrary to law or that the circulars were wrongly issued or that the law has undergone changes holding their withdrawal; that thus, in respect of cases, which directly follow with the situations covered by the circulars, the liability to tax should continue to be in accordance with section 9 of the Act and its intent; that the relevant sections, namely section 5(2) and section 9 of the Income Tax Act, 1961 not having undergone any change in this regard, the clarification in Circular No. 23 still prevails even after the withdrawal; and that no tax is, therefore, deductible under section 195 and consequently, the expenditure on export commission payable to a non-resident for services rendered outside India is not liable for withholding tax.

12. The assessee relied on GE India Technology Centre (P.) Ltd. (supra) wherein it has been held that —

‘In our view, section 195(2) is based on “principle of proportionality”. The said sub-section gets attracted only in cases where the payment made is a composite payment in which a certain proportion of payment has an element of “income” chargeable to tax in India.

The Supreme Court observed in CIT v. Toshoku Ltd. (1980) 125 ITR 525 (SC) held that the non-resident assessees did not carry on any business operations in the taxable territories. They acted as selling agents outside India. The receipt in India of the sale proceeds of tobacco remitted or caused to be remitted by the purchasers from abroad does not amount to an operation carried out by the assessees in India as contemplated by clause (a) of the Explanation to section 9(1)(i) of the Act.’

13. The assessee further relied on CIT v. Eon Technology (P.) Ltd. (2011) 343 ITR 366 (Delhi), wherein it has been held that export commission paid to non-resident was not taxable in India.

14. The assessee still further relied on the order of Mumbai ITAT in the case of Armayesh Global v. Asstt. CIT (2012) 51 SOT 564 (Mum-Trib), wherein it has been held that export commission earned by non-resident agent is not taxable in India.

15. The assessing officer, however, did not agree with the stand taken by the assessee. He disallowed the assessee’s claim under section 40(a)(i) of the Act. While doing so, he observed that the Circular No. 786 has been withdrawn, therefore, the income arising to the foreign agents on account of export commission falls under section 5(2)(b) of the Income Tax Act, as the income has accrued in India when the right to receive the income became vested; that section 5(2)(b) of the Income Tax Act deals with the scope of total income whereby the income of a non-resident includes all income from whatever sources derives, which accrues or arises or is deemed to accrue or arise in India during such previous year; that under section 9(1)(i) of the Income Tax Act, income accruing or arising directly or indirectly through or from any business connection in India or source of Income in India shall be deemed to accrue or arise in India; that the words ‘accrue’ or ‘arise’ occurring in section 5 of the Act have more or less a synonymous sense and income is set to accrue or arise when the right to receive it comes in existence; that no doubt, the agents render services abroad and have solicited orders, but the right to receive commission arises in India when the order is executed by the commission agent in India; and that the agents have rendered services abroad in the form of soliciting the orders and the commission is remitted to them abroad in lieu of services rendered for execution of business orders in India.

16. It remains undisputed that in respect of payment made to non-resident agents, no TDS has been deducted as these agents have procured export orders for the assessee firm and assisted in the timely realization of the payments; that the commission is declared in the GR issued by the assessee for the purpose of export of goods; that the same is within the limits prescribed by Reserve Bank of India and all remittances have been made through proper banking channels; that the non-resident agent has carried out all his activities outside India, did not render any service in India and did not have Permanent Establishment (PE) in India; that residing in the foreign countries with whom India has entered into a DTAA and under the Article 7 of the said DTAA, the income received is being taxed in their hands in their country; that the assessee has remitted payments to them outside India through proper banking channels; that these agents have carried out business activity of procurement of export orders and timely realization of payments for the assessee outside India; that as the income received by these agents is business income, the same cannot be taxed under the Income Tax Act, 1961 in the absence of business connection and permanent establishment in India; that these non-resident commission agents offer to tax the income received on account of the transactions with the assessee as their business income in their country of residence; and that the role and responsibilities of these agents are as under —

(i) to procure orders from buyers

(ii) to negotiate price and other terms and intimate the same to the assessee

(iii) to re-negotiate the terms/price if necessary, based on the instructions of the assessee

(iv) follow up in getting purchase orders from customers and forward the same to the assessee

(v) follow up regarding LC opening, shipment and payment

17. Against the aforesaid services rendered, these agents raise a debit note/invoice for commission at the agreed rate and the amount is remitted through proper banking channels to their bank account in their country of residence.

18. The assessing officer has invoked the provisions of section 5(2) and section 9(1)(i) of the Act, however he has not dwelt beyond merely mentioning these circular without bringing anything on record about business connection or permanent establishment of such agents in India. The assessing officer in his order has also not disputed the fact that the foreign agents are located outside India and have no permanent establishment in India. Therefore it is not a case where the non-resident agents are carrying on any business activity in India. Rather, it is the appellant who has engaged the services of foreign agents outside India on pure commercial and business terms for its sales outside India and also to pursue the payments to be made by the purchasers as located abroad.

19. As per section 9(1) of the Act —

“The following incomes shall be deemed to accrue or arise in India :–

(i) all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situate in India.

Explanation 1.–For the purposes of this clause —

(c) in the case of a business of which all the operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India;

(d) in the case of a non-resident, no income shall be deemed to accrue or arise in India to him through or from operations which are confined to the purchase of goods in India for the purpose of export;

***                                                                  ***                                                      ***

(c) in the case of a non-resident, being a person engaged in the business of running a news agency or of publishing newspapers, magazines or journals, no income shall be deemed to accrue or arise in India to him through or from activities which are confined to the collection of news and views in India for transmission out of India;

(d) in the case of a non-resident, being —

(1) an individual who is not a citizen of India; or

(2) a firm which does not have any partner who is a citizen of India or who is resident in India; or

(3) a company which does not have any shareholder who is a citizen of India or who is resident in India,

no income shall be deemed to accrue or arise in India to such individual, firm or company through or from operations which are confined to the shooting of any cinematograph film in India;

Explanation 2.–For the removal of doubts, it is hereby declared that “business connection” shall include any business activity carried out through a person who, acting on behalf of the non-resident, —

(d) has and habitually exercises in India, an authority to conclude contracts on behalf of the non-resident, unless his activities are limited to the purchase of goods or merchandise for the non-resident; or

(e) has no such authority, but habitually maintains in India a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the non-resident; or

(f) habitually secures orders in India, mainly or wholly for the non-resident or for that non-resident and other non-residents controlling, controlled by, or subject to the same common control, as that non- resident:

Provided that such business connection shall not include any business activity carried out through a broker, general commission agent or any other agent having an independent status, if such broker, general commission agent or any other agent having an independent status is acting in the ordinary course of his business:

Provided further that where such broker, general commission agent or any other agent works mainly or wholly on behalf of a non-resident (hereafter in this proviso referred to as the principal non-resident) or on behalf of such non-resident and other non-residents which are controlled by the principal non-resident or have a controlling interest in the principal non-resident or are subject to the same common control as the principal non-resident, he shall not be deemed to be a broker, general commission agent or an agent of an independent status”.

20. In EON Technology (P.) Ltd. (supra), while dealing with payment of commission by the said assessee company to its parent company, i.e., ETUK of UK which was located outside India, Hon’ble Delhi High Court has held that “the commission payment to its British parent/holding company ETUK could not said to have been accrued to ETUK in India and therefore, the assessee was not liable to deduct tax at source from payment of commission to ETUK”. The head note of order is reproduced hereunder :–

“Section 9 of the Income Tax Act, 1961–Income–Deemed to accrue or arise in India–Assessment year 2007-08–Assessee-company was engaged in business of development and export of software–During relevant assessment year, it had paid commission to its British parent/holding company ETUK on sales and amounts realized on export contracts procured by ETUK for assessee–Assessing officer held that commission income earned by ETUK had accrued in India or was deemed to accrue in India and, therefore, assessee was liable to deduct tax at source there from and as there was failure, said expenditure should be disallowed under section 40(a)(ia)–Whether when ETUK was not rendering any service or performing any activity in India itself, commission income could be said to have accrued, arisen to or received by ETUK in India merely because it was recorded in books of assessee in India or was paid by assessee situated in India–Held, no–Whether for applying section 9 assessing officer was required to examine whether said commission income was accruing or arising directly or indirectly from any business connection in India–Held, yes–Whether since facts found by assessing officer did not make out a case of business connection as stipulated in section 9(1)(i), commission income could not be said to have accrued to ETUK in India and, therefore, assessee was not liable to deduct tax at source from payment of commission to ETUK–Held, yes [In favour of assessee].”

21. In CIT v. Toshoku Ltd. (1980) 125 ITR 525 (SC), the Hon’ble Apex Court while dealing with the twin aspects of the situation in the case of the assessee before it, as to what was the effect of the entries in the books of account of the Indian assessee which had resulted in debit and credit entries on account of commission and secondly, whether procurement of export orders by the foreign companies for the Indian company had resulted in a business connection, has opined as under :–

“It cannot be said that the making of the book entries in the books of the statutory agent amounted to receipt by the assessees who were non-residents as the amounts so credited in their favour were not at their disposal or control. It is not possible to hold that the non-resident assessees in this case either received or can be deemed to have received the sums in question when their accounts with the statutory agent were credited, since a credit balance, without more, only represents a debt and a mere book entry in the debtor’s own books does not constitute payment which will secure discharge from the debt. They cannot, therefore, be charged to tax on the basis of receipt of income actual or constructive in the taxable territories during the relevant accounting period.

***                                                                  ***                                                      ***

In the instant case, the non-resident assessees did not carry on any business operations in the taxable territories. They acted as selling agents outside India. The receipt in India of the sale proceeds of tobacco remitted or caused to be remitted by the purchasers from abroad does not amount to an operation carried out by the assessees in India as contemplated by clause (a) of the Explanation to section 9(1)(i) of the Act. The commission amounts which were earned by the non-resident assessees for services rendered outside India cannot, therefore, be deemed to be incomes which have either accrued or arisen in India. The High Court was, therefore, right in answering the question against the department.”

22. In Dy. CIT v. Divi’s Laboratories Ltd. (2011) 131 ITD 271 (Hyd.), it was held that the CBDT by its Circular No. 7, dt. 22-10-2009 had withdrawn its earlier Circular Nos. 23, dt. 23-7-2009, 163, dt. 29-5-1975 and 786, dt. 7-2-2000; that the earlier Circulars issued had clearly demonstrated the illustration to explain that such commission should be paid without deduction of tax; that thus, the main thrust, in such situation, is whether the commissioner paid to overseas agents, who are non-resident entities and who render services only at such particular place, is assessable to tax; that section 195 very clearly speaks that unless the income is liable to be taxed in India, there is no obligation to deduct tax; that in order to determine whether the income can be deemed to be accrued or arisen in India, section 9 is the basis; that 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 were not satisfied in the instant cases; that under these circumstances, withdrawal of earlier circulars issued by the CBDT had no assistance to the department, in any way, in disallowing such expenditure; that it appeared that an overseas agent of Indian exporter operated 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 those commission payments; that section 195 has to be read along with the charging sections 4, 5 and 9; that one should not read section 195 to mean that the moment there is a remittance, the obligation to deduct TDS automatically arises; that if such contention was to be accepted, it would mean that on mere payment in India, income would be said to arise or accrued in India; that if the contentions of the department were to be taken as correct that any person, making payment to a non-resident, was 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 Act, by which, a payer can obtain refund; that as per section 237 read with section 199, it implies that only the recipient of the sum i.e., payee would seek a refund; that in view of the above, hence, no tax is deductible under section 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 rigors of section 40(a)(ia); that in the instant case, the learned Commissioner (Appeals) observed that the assessing officer had not been able to establish that there was specific intention of the payee to receive the payment within the territory of India, therefore, the learned Commissioner (Appeals) rightly did not agree with the view taken by the assessing officer with regard to the addition made on this issue and the learned Commissioner (Appeals) was justified in directing the assessing officer to delete the said addition; and that after considering the totality of facts and the circumstances of the case, the order of the learned Commissioner (Appeals) on this issue was not to be interfered with and, accordingly, the same was to be upheld.

23. In Faizan Shoes (P.) Ltd. (supra), wherein also there was a similar issue of export commission being paid by a shoe manufacturer outside the India without deducting TDS thereon, the Hon’ble High Court has held as under :–

“10. While dealing with section 9(1) of the Act, the Supreme Court in CIT v. Toshoku Ltd. (1980) 125 ITR 525 (SC), on considering a transaction where tobacco was exported to Japan and France and sold through non-resident assessees who were paid commission, held as under :–

The second aspect of the same question is whether the commission amounts credited in the books of the statutory agent can be treated as incomes accrued, arisen, or deemed to have accrued or arisen in India to the non-resident assessees during the relevant year. This takes us to section 9 of the Act. It is urged that the commission amounts should be treated as incomes deemed to have accrued or arisen in India as they, according to the department, had either accrued or arisen through and from the business connection in India that existed between the non-resident assessees and the statutory agent. This contention overlooks the effect of clause (a) of the Explanation to clause (i) of sub-section (1) of section 9 of the Act which provides that in the case of a business of which all the operations are not carried out in India, the income of the business deemed under that clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India. If all such operations are carried out in India, the entire income accruing therefrom shall be deemed to have accrued in India. If however, all the operations are not carried out in the taxable territories, the profits and gains of business deemed to accrue in India through and from business connection in India shall be only such profits and gains as are reasonably attributable to that part of the operations carried out in the taxable territories. If no operations of business are carried out in the taxable territories, it follows that the income accruing or arising abroad through or from any business connection in India cannot be deemed to accrue or arise in India (See CIT v. R.D. Aggarwal & Co. (1965) 56 ITR 20 (SC) and Carborandum Co. v. CIT (1977) 108 ITR 335 (SC) which are decided on the basis of section 42 of the Indian Income Tax Act, 1922, which corresponds to section 9(1)(i) of the Act).

In the instant case, the non-resident assessees did not carry on any business operations in the taxable territories. They acted as selling agents outside India. The receipt in India of the sale proceeds of tobacco remitted or caused to be remitted by the purchasers from abroad does not amount to an operation carried out by the assessees in India as contemplated by clause (a) of the Explanation to section 9(1)(i) of the Act. The commission amounts which were earned by the non-resident assessees for services rendered outside India cannot, therefore, be deemed to be incomes which have either accrued or arisen in India. The High Court was, therefore, right in answering the question against the department.

11. The facts of the present case are akin to the facts of the decision in Toshoku Limited case, referred supra. In the instant case also the assessee engaged the services of non-resident agent to procure export orders and paid commission. That apart, the Commissioner (Appeals) as well as the Tribunal have correctly applied the principle laid down in GE India Technology Cen. (P.) Ltd. case, referred supra, to hold that the assessee is not liable to deduct tax at source when the non-resident agent provides services outside India on payment of commission.”

24. Regarding assessing officer’s reliance on SKF Boilers it is observed that the same is not found to be applicable as the said ruling was in respect of an entity based in Pakistan with which India did not have any treaty or DTAA, whereas in the present appeal, the assessee has made its submission with regard to the treat provisions as existing vide the DTAAs entered into by India with the countries, i.e., Italy, USA and UK wherein the commission agents reside.

25. The decision of the Authority for Advance Rulings in the case of SKF Boilers & Driers (P.) Ltd. (supra) has considered its earlier decision in the case of Rajiv Malhotra, In re (2006) 284 ITR 564 (AAR) and the decision in the case of Spahi Projects (P.) Ltd. (supra) dated 29-7-2009 in AAR No. 802 of 2009 has not been considered and hence the reliance on the decision of AAR in the case of SKF Boilers & Driers Pvt. Ltd., by the learned assessing officer does not take into account the factual and legal matrix, in which the AAR has held that “in the instant case, the non-resident assessees did not carry on any business operations in the taxable territories. They acted as selling agents outside India. The receipt in India of the sale proceeds of tobacco remitted or caused to be remitted by the purchasers from abroad does not amount to an operation carried out by the assessees in India as contemplated by clause (a) of the Explanation to section 9(1)(i) of the Act”.

26. The assessing officer completed assessments under section 143(3) for the assessment years 2011-12 and 2012-13 wherein the learned assessing officer has not made any disallowance in respect of the payment of commission to the foreign agents residing in the country, with which India has entered into DTAA.

27. Apropos assessing officer’s contention that the CBDT, vide Circular No. 7, dt. 22-10-2009, had withdrawn its Circulars Nos. 23, dt. 23-7-1969, 163, dt. 29-5-1975 and 786, dt. 7-2-2000, which were based on Circular No. 23; that the Circular No. 23 was issued in the context of section 9 of the Act which deems certain incomes to accrue or arise in India for non-residents; and that in view of this, the assessee should have deducted tax at source under section 195 of the Act on payments of commission made to non-residents agents with effect from 22-10-2009, we find that the assessing officer has not made out any case that whether the issue of Circular No. 7 of 2009 by CBDT by which the earlier circulars were withdrawn, will make any difference as to bringing the commission payments within the ambit of tax as he has not adverted to the admitted position that there exists no business connection or permanent establishment of such agents in India.

28. It is not disputed that that the withdrawal of the Circulars No. 23 and 786 has been made on 22-10-2009 vide CBDT Circular No. 7 of 2009 and mere withdrawal of the circular does not negate the principles of income deemed to accrue or arise in India or outside India. The CBDT has not stated that any part of the circulars is contrary to law or that the circulars were wrongly issued or that the law has undergone changes holding their withdrawal. Thus, in respect of cases, which directly follow with the situations covered by the circulars, the liability to tax should continue to be in accordance with section 9 of the Act and its intent. The relevant sections, namely section 5(2) and section 9 of the Income Tax Act, 1961 not having undergone any change in this regard, the clarification in Circular No. 23 still prevails even after the withdrawal. No tax is therefore deductible under section 195 and consequently, the expenditure on export commission payable to a non-resident for services rendered outside India is not liable for withholding tax.

29. It is seen that the learned Commissioner (Appeals) has duly taken into consideration the above facts and circumstances besides the case laws.

30. Then, also for assessment year 2011-12, a similar disallowance was made, which was deleted (APB 76-86) by the Commissioner (Appeals) and the department did not file any appeal against the Commissioner (Appeals)’s order.

31. Apropos, Circulars of CBDT, in Kerala Finance Corpn. v. CIT (1994) 210 ITR 129 (SC), the Apex Court has stated that the circular issued by CBDT under section 119 of the Act cannot override or detract the provisions of the Act. Thus, the withdrawal of circular does not affect the settled position that export commission is not taxable in India as services are rendered outside India.

32. Moreover, post withdrawals of the circulars, in ITO v. Trident Exports (2014) 149 ITD 361 (Chennai-Trib.), it has been held as under :–

8. We have heard both the parties and carefully perused the materials available on record. From the facts of the case, it is evident that the assessee has made payments to commission agents located in foreign countries. These foreign agents have rendered services in their respective countries and had received the commission. It is also evident that the foreign agents did not have any PE in India and there was nothing brought on record to show that the agreements between the assessee & commission agents were entered in India. In these circumstances the decision rendered in the case of Toshuku Ltd. (supra) is squarely applicable considering the acts of the case before us. In this case the Hon’ble Apex Court held that the commission agents, who are engaged in the service executed outside India, cannot be considered to carry on any business operations in India and therefore, the provisions of section 9(1)(i) of the Act and Explanation 1A will not be applicable. Similarly, the Hon’ble Apex Court, in the case of GE India Technology Cen. (P.) Ltd. (supra) has held that the expression “chargeable under the provisions of the Act in section 195(1)” shows that the remittance has to be of trading receipt, the whole or part of which, is liable to tax India. If tax is not so assessable, there is no question of tax at source being deducted. Considering the facts and circumstances of the case and the decisions rendered by the Hon’ble Apex Court, we are of the considered view that the learned Commissioner (Appeals) had decided the issue in accordance with law. Therefore, we hereby confirm the order of the learned Commissioner (Appeals).

33. In Dy. CIT v. Farida Prime Tannery (P.) Ltd. [IT Appeal Nos. 189 to 191 & 193 to 197 (Mds.) of 2014, dt. 28-3-2014], it has been held —

“5. Heard both sides, perused orders of lower authorities and the case laws relied on. In all these appeals, assessing officer disallowed agency/sales commission paid by the assessee to the non-resident agents on the ground that assessee has not deducted TDS under section 195 of the Act and therefore sales commission paid by the assessee is not allowable expenditure under section 40(a)(i) of the Act. The Commissioner (Appeals) elaborately considered this issue and held that sales commission paid by assessee is not chargeable to tax in India as the services were rendered outside India by non-residents and therefore, provisions of section 195 have no application so as to disallow commission payments under section 40(a)(i) of the Act. While holding so, the Commissioner (Appeals) considered various decisions on the issue including the decision of Hon’ble Supreme Court in the case of GE India Technology Centre (P.) Ltd. (supra). The Commissioner (Appeals) in one of the case before us in K.H. Arind Pvt. Ltd. following the decision of the co-ordinate Bench of this Tribunal in the case of Farida Shoes (P.) Ltd. (supra) deleted the disallowance observing as under :–

***                                                                 ***                                                ***

6. Similar issue has been considered by this Tribunal in the case of ITO v. Faizan Shoes (P.) Ltd. (2013) 58 SOT 245 (Chennai-Trib.)wherein the co-ordinate bench of this Tribunal, to which one of us is a party, after considering the decision of the Hon’ble Supreme Court in the case of GE Technology Centre (P.) Ltd. (supra) held that sales commission paid by the assessees to non-residents are not chargeable to tax in India, therefore provisions of section 195 are not applicable. On going through the above order of the Commissioner (Appeals), we find that in all these cases assessees paid sales commission to its non-resident agents for the services rendered by them outside India and the sales commission is not chargeable to tax in India so as to deduct TDS in such payments under section 195 of the Act. Therefore, respectfully, following the decision of the Hon’ble Supreme Court in the case of GE India Technology Centre (P.) Ltd. (supra) and the above cited decision of the co-ordinate bench of this Tribunal, we sustain the order of the Commissioner (Appeals) in deleting the disallowance made under section 40(a)(i) of the Act.

In assessee’s case also these facts are comparable with the decision of the Apex Court and other decisions cited above. The commission amounts which were earned by the non-resident assessees for services rendered outside India cannot, therefore, be deemed to be incomes which have either accrued or arisen in India. The said decision of Supreme Court takes into consideration the principles of income deemed to accrue or arise in India and outside India.”

34. In CIT v. Model Exims (2014) 363 ITR 66 (All.), it has been held to the effect that the fact situation contemplated or clarified in the Explanation added by the Finance Act, 2010 is not applicable to the present case, as in the present case the agents appointed by the assessee had their offices situated in a foreign country and that they did not provide any managerial services to the assessee; that section 9(1)(vii) deals with technical services and has to be read in that context; that the agreement of procuring orders would not involve any managerial services; that the agreement did not show the applicability or requirement of any technical expertise as functioning as selling agent, designer or any other technical services; and that therefore, the Tribunal has rightly deleted the disallowance.

35. Coming to the case laws relied on by the department in the following cases, it has been held that the payment made to the non-resident was to be treated as fees for technical services covered under the provisions of section 9(1)(vii) :–

(i) Asstt. CIT v. Evolv Clothing Co. (P.) Ltd. (2013) 142 ITD 618 (Chennai – Trib.)

(ii) Ashapura Minichem Ltd. v. Asstt. DIT (International Taxation) (2010) 40 SOT 220 (Mum.)

(iii) Rajiv Malhotra, (supra)

(iv) GVK Industries Ltd. v. ITO (2015) 371 ITR 453 (SC)

(v) GVK Industries Ltd. v. ITO (1998) 228 ITR 564 (AP)

(vi) Shell India Markets (P.) Ltd., In re (2012) 342 ITR 223 (AAR-New Delhi)

(vii) ONGC Videsh Ltd. v. ITO (2013) 141 ITD 556 (Delhi – Trib.)

(viii) Pr. CIT v. Madhyanchal Vidyut Vitran Nigam Ltd. [IT Appeal No. 86 of 2015]

(ix) Bosch Ltd. v. ITO (2012) 141 ITD 38 (Bang.-Trib.)

(x) Sintex Industries Ltd. v. Asstt. DIT (2013) 141 ITD 98 (Ahd.-Trib.)

36. In the assessee’s case, however, as seen hereinabove, the relevant provisions sought to be attracted by the assessing officer is section 9(1)(i). That being the case, none of these cases, is applicable to the present one.

37. In Palam Gas Service v. CIT (2017) 394 ITR 300 (SC), overruling CIT v. Vector Shipping Services (P.) Ltd. (2013) 357 ITR 642 (All.), the Hon’ble Supreme Court has upheld the disallowance made under section 40(a)(ia) of the Act for TDS default on freight payment. It has been held that the plea of the assessee company that no disallowance can be made under section 40(a)(ia), as the word “payable” occurring in section 40(a)(ia) refers to only those cases, where the amount is yet to be paid and does not cover the cases where the amount is actually paid, is not acceptable as section 40(a)(ia) covers not only those cases where the amount is payable, but also when it is paid. The applicability of this decision to the facts of the present case, has not been made out.

38. In Performing Right Society Ltd. v. CIT AIR 1976 SC 1973, the issue related to payment of royalty, which falls under section 9(1)(vi) of the Income Tax Act and on this single score, this decision is not applicable to the facts of the present case, since the question herein is with regard to applicability of section 9(1)(i) of the Act. Further, the question raised before the Hon’ble Supreme Court in that case was that since the agreement was executed in England and the royalty was payable in England, no income accrued or arose in India. In the present case, on the other hand, it remained undisputed by the authorities below, that the recipient of the commission paid by the assessee had rendered their services for the procurement of export orders and the realization of the payments for the assessee outside India. It is nowhere the case of the authority below or of the department before us, that these agents have any Permanent Establishment in India or any business connection in India. Therefore, Performing Right Society (supra) is also not applicable to the facts of the present case.

39. Otherwise too, it is seen that the decisions relied on by the learned DR pertain to clauses (vi) and (vii) of section 9(1) of the Act. In this regard, it is seen that an Explanation was inserted in section 9(2) of the Act, by substitution, with retrospective effect from 01-6-1976. This Explanation reads as follows :–

“Explanation.–For the removal of doubts, it is hereby declared that for the purposes of this section, income of a non-resident shall be deemed to accrue or arise in India under clause (v) or clause (vi) or clause (vii) of sub-section (1) and shall be included in the total income of the non-resident, whether or not, —

(i) The non-resident has a residence or place of business or business connection in India; or

(ii) the non-resident has rendered services in India.”

40. In the case of the assessee, the applied section is section 9(1)(i) of the Act.

Therefore, the above Explanation to section 9(2) is not applicable, since it does not talk of clause (i) of sub-section (1) of section 9 of the Act. Therefore, the decisions rendered in cases relevant to clauses other than clause (i) of sub-section (1) of section 9 of the Act are not relevant to the present case. Otherwise too, as considered hereinabove, it has been held that the non-resident did not have any business connection in India and there was no liability to withhold tax under section 195 of the Act. Moreover, the assessing officer has himself accepted that payments made prior to withdrawal of the Circular do not call for any disallowance under section 40(a)(i) of the Act.

41. In view of the above, the order of the learned Commissioner (Appeals) is found to be well reasoned. The department has not been able to dislodge the detailed well reasoned findings recorded therein. Therefore, the grievance sought to be raised by the department by way of Ground Nos. 1 & 2 is found to be shorn of merit and it is rejected as such. The finings of the learned Commissioner (Appeals) are confirmed.

42. Ground Nos. 3 to 5 are general.

43. In the result, the appeal is dismissed.

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