Lucknow Income-tax Appellate Tribunal (the “Tribunal”) in the case of Sanjiv Gupta Vs. DCIT [201 1-TII-06-ITAT-LKW-INTL] , held that Circular No. 7 of 2009 dated 22 October, 2009 withdrawing the Circular No. 23 of 1969 dated 23 July, 1969 would be effective only prospectively from 22 October, 2009. The Circulars are briefly explained in the following table:
|Circular No. 23 of 1969||Circular No. 7 of 2009|
|The Central Board of Direct taxes (“CBDT”) had issued this Circular to provide clarifications in deciding questions regarding the applicability of Section 9 of the Income-tax Act, 1961 (the “Act”) to certain situations including, among others, commission payment to foreign agents of Indian exporters||Circular No.7 of 2009 had withdrawn Circular No. 23 of 1969, on the ground that Circular No. 23 was interpreted by some taxpayers to claim relief by some taxpayers, which was not in accordance with the provisions of Section 9 of the Act|
The assessee was engaged in the manufacturing and export of leather bags and other articles, and was also in the business of lending money.
The assessing officer (the “AO”) disallowed commission payment on export to non-residents on account of the non-withholding of tax under section 195 of the Act for assessment year (“AY”) 2006-07.
The assessee relied on CBDT Circular No. 23 of 1969 (above) and Circular No. 786 dated 7 February, 2000, and contended that no tax was required to be deducted under section 195 of the Act with regard to payment of commission to foreign agents.
The assessee also relied on the decision in the case of CIT v. Siemens Aktiengesellschaft [2010-TIOL-102-ITAT-MUM] and contended that the subsequent withdrawal of Circular No. 23 of 1969 (above), vide Circular No.7 of 2009 dated 22 October, 2009, would not alter the legal position propounded by Circular No. 23. The assessee further contended that when the payment was made to the non-resident agent, Circular No. 23 (above) was in existence. Hence, there was no liability to withhold the taxes, as the position existing at the time of making the payment could not be altered by withdrawing that circular subsequently.
The Commissioner of Income-tax (Appeals) (“CIT(A)”) held that Circular No. 7 of 2009 (above), withdrawing Circular No. 23 of 1969 (above) would be effective only from 22 October, 2009 and not at an earlier date i.e. it would have a prospective effect. Hence, there was no liability for withholding the tax from the commission payments.
The Tribunal held that a circular issued earlier creates a vested right in the assessee, and if such rights are curtailed or withdrawn by a subsequent circular, such subsequent circular would apply prospectively and not retrospectively. While so holding, the Tribunal placed reliance on the decision in the case of BASF (India) Ltd. and another v. CIT  280 ITR 136 (Bom.) where it was held that circulars which are in force during the relevant assessment years are the ones that have to be applied, and subsequent circulars either withdrawing or modifying the earlier circulars have no retrospective application.
The Tribunal relied on Circular No. 786 of 2000 (above), clarifying Circular No. 23 of 1969 (above) wherein it was mentioned that when the non-resident agent operates outside the country, no part of income accrues or arises in India. Also, when the payment is remitted abroad directly, it could not be held to be an amount received by or on behalf of the agent in India. Hence, such payment would not be taxable in India.
Accordingly, the Tribunal held that as per CBDT Circular No. 23 of 1969 (above) and Circular No. 786 (above), the assessee was not required to withhold taxes under section 195 of the Act on payment of commission to the foreign agent.
Conclusion- The above decision reiterates the position that withdrawal of a beneficial circular dealing with the tax ability of non-residents would be prospective in nature i.e. an assessee can rely on CBDT Circular no. 23 of 1969 (above) and Circular no. 786 of 2000 (above) when they were in force during the relevant assessment years. The Tribunal did not decide on the tax ability of commission payment to non-residents, where there is no clarificatory circular for the purpose.