Withdrawal of Circular cannot be retrospective: TDS not deductible on Commission paid to non-resident agent Outside India

Issue- (a) Whether on the facts and in the circumstance of the case and  in  law, the Tribunal  was justified in holding that commission payments made to non­resident sales agents on which no tax was deducted is not dis allowable u/s. 40(a)(i)?

Facts of the Case and Decision of Bombay High Court

(a) For the subject Assessment Year, the Respondent ­Assessee  had  during two Assessment Years made payment of commission to non­ resident agent in respect of sales made out side India. The Assessing Officer in both the Assessment Years passed an order disallowing the payments made to non­resident agent under Section 40(a) (i) of the Act for failure to deduct tax at source. The basis of both the Assessment Order  disallowing the expenditure is in view  of the   fact that the Circular No. 23 of 1969 and 786 of 2000 issued by the CBDT which had clarified that commission paid to non­resident  agent for sale does not give it rise to income had been withdrawn by Circular No. 7 dated 22nd  October, 2009;

(b) In appeal, so far as Assessment Year 2007­- 08 was concerned, the CIT(A) upheld  the order of the Assessing Officer on the same ground i.e. withdrawal of the earlier Circular Nos. 23/1969 and 786/2000 by Circular No. 7 of 2009. So far as Assessment Year  2008­- 09 is concerned, the CIT(A) by order dated 10th October, 2009 allowed Respondent ­Assessee’s appeal. The CIT(A) while allowing Respondent ­Assessee’s Appeal  for the Assessment Year 2008­- 09, inter alia held that the commission agent did not have any business connection in India as they had no permanent establishment in India and in fact neither  any income arose or accrued to non­resident agent in India. The CIT(A), inter alia relied upon the decision of the Tribunal In DeIT v/s. Ardeshi B. Cursetjee & Sons Ltd. 115 TTJ 916 which held that the commission paid to non­resident agent outside India for the services rendered were not chargeable to tax in India. In these circumstances, the CIT(A) held that there was no occasion to deduct tax at source in respect of the payment made to the non­resident agent;

(c)  Moreover, the order of CIT(A) also holds that the Circular No. 7 of 2009 withdrawing the earlier Circulars will not have retrospective effect so as to render Circular No. 23 of 1965 and 786 of 2000   inoperative for the Assessment Years;

(d) Being aggrieved, the Respondent­ Assessee as well as Revenue preferred an Appeal to the Tribunal from the order of CIT(A). In respect of the order of CIT(A) for Assessment Year 2007- 08- Respondent ­Assessee’s filed an appeal, while in respect of order of the CIT(A) for the Assessment Year 2008­- 09 –Revenue has filed Appeal;

(e) By the common impugned order, the Tribunal after considering the submissions places reliance upon the decision of its Co­ordinate Bench in Armayesh Global v/s. ACIT, 50 SOT 564, the decision of the Delhi High Court in CIT v/s. Eon Technology 343 ITR 366 and the reasons recorded by the CIT(A) in his order for the Assessment Year 2008­- 09 to conclude that the income of non­resident commission agent cannot be considered as income arising or accruing in India. Therefore, the provisions of Section 40(a)(i) would have no application for the two Assessment Years under  consideration;

The grievance of the Revenue is that the impugned order of the  Tribunal merely reproduces the order of the CIT(A) for the Assessment Year 2008- ­09 which was in favor of the Respondent­ Assessee and approves the same. This without bestowing any consideration to the order passed by the CIT(A) in respect of Assessment Year 2007­- 08 which was in favor of the Revenue. In these circumstances, it is submitted that  appeals warrant admission.

(g) We find that the common order of the Tribunal while dealing with the order of the CIT(A) for the  Assessment  Year  2008­- 09 also considers the order of the CIT(A) for the Assessment Year 2007­ 08 while dealing with the Revenue’s contention as reflected in the orders of the Assessing Officer which are similar for both the Assessment Years. In fact, the reasons for the order of the CIT(A)for  Assessment Year 2007- ­08 are identical to the Assessing Officer’s orders in both the Assessment Years i.e. the earlier Circular Nos. 23 of 1969 and 786 of 2000 stand withdrawn by Circular No. 7 of 2003. Therefore, the earlier Circular which cover the issue would not be applicable/ available for the Assessment Years 2007­- 08 and 2008­- 09. In fact, the CIT(A) in his order for Assessment Year 2008­09 while allowing  the  appeal of  the Respondent ­Assessee places reliance upon the decision  of the Tribunal in case of Ardeshi B. Cursetjee (supra) which in turn relies upon the decision of  the  Supreme Court in  CIT v/s. Toshoku  Ltd. 125 ITR 525 wherein on  almost identical facts, the Apex Court held that the commission earned by the non­resident agent who carried on the business of selling Indian goods outside India, cannot be said have deemed to be income which has accrued and/or arisen in India. This view of the CIT(A) for Assessment Year 2008- ­09 was found acceptable by the Tribunal in its impugned order and applied the same even for Assessment Year 2007- ­08. In view of the fact that the issue sands  concluded in favor of the Respondent­ Assessee by the decision of the Supreme Court in Toshoku Ltd. (supra). The Revenue has not shown any change in the law in the subject Assessment Years which would warrant our not following the Apex Court’s decision;

(h) Moreover, we find CBDT  Circular No. 23 of 1969 has been reproduced- in the impugned order and the relevant extract reads as under:­

“ Foreign agents of Indian exports – a foreign agent of Indian  exporter operates in his own country and no part of his income arises in India. His commission is usually remitted directly to him and is,   therefore, not received by him or on his behalf in India. Such an agent is not liable to income tax in India on the commission.”

This Circular of 1969 was admittedly in force during the two Assessment Years. It was only subsequently i.e. on 22nd  October, 2009 that the earlier Circular of 1969 and its reiteration as found in Circular No. 786 of 2000 were withdrawn. However, such subsequent withdrawal of an earlier Circular cannot have retrospective operation as held by this Court in UTI v/s. P. K. Unny and Others 249 ITR 612.

(i) In view of the above, not only the entire issue stands concluded in favor of the Respondent­ Assessee in the present facts by the CBDT Circular Nos. 23 of 2969  and 786 of 2000 which were in force  during the subject Assessment Years but also by the decision of the Apex Court in Toshoku Ltd. (supra) in favor of the Respondent­ Assessee. Thus, no substantial question of law arises in the   question framed  for our consideration. Accordingly, Question (a) not entertained.