Scorpios Apparels Pvt. Ltd., New Delhi vs Assessee

M/s. Scorpios Apparels Private Ltd., vs. ACIT, Circle 7 (1), C - 30, Okhla Industrial Area, Phase - I, New Delhi. New Delhi.

(PAN : AAECS4442H)

(APPELLANT) (RESPONDENT)

ASSESSEE BY : Shri Sunil Bakshi, CA REVENUE BY : Shri Satpal Singh, Senior DR

ORDER

PER B.C. MEENA, ACCOUNTANT MEMBER :

This appeal filed by the assessee emanates from the order of the CIT

(Appeals)-X, New Delhi dated 04.12.2012.

2. The assessee company is engaged in the business of manufacturing

and export of high fashioned readymade garments. The Assessing Officer

made certain additions which have been confirmed by the CIT (A). Now,

the assessee is in appeal by taking the following grounds :-

"1. On the facts and circumstances of the case, the order passed by the learned CIT (A) is bad both in the eye of law and on facts.

2. On the facts and circumstances of the case, the learned CIT (A) has erred, both on facts and in law, in confirming the action of the AO by sustaining addition of Rs.85,342/- being the difference in the value of job work effected in the TDS certificate and the amount reflected in the 2 ITA No.741/Del./2013

Profit and Loss account on the ground that the arguments made by the appellant during the course of appellate proceedings were not supported with any concrete documents and convincing explanations.

3. On the facts and circumstances of the case, the learned CIT (A) has erred, both on facts and in law, in confirming the action of the AO in disallowing an amount of Rs.9,84,206/- on account of commission invoking the provision of section 40(a)(i) of the Act.

4. That the appellant craves leave to add, amend or alter any of the grounds of appeal."

3. Ground Nos.1 & 4 are general in nature and do not require any

adjudication.

4. In the Ground No.2, the issue involved is sustaining the addition of

Rs.85,342/- which was the difference in the value of job work effected in

the TDS certificate and the amount reflected in the profit & loss account.

The CIT (A) has confirmed this addition by holding that the arguments of

the assessee during the appellate proceedings were not supported with any

concrete documents and convincing explanations.

5. We find that the assessee has issued two credit notes amounting to

Rs.85,342/- and details of the same were filed before the authorities below

and the revenue has not pointed out any discrepancy in the issuing of the

credit notes to M/s. Gaurav International. Considering all these facts, we

allow this ground of assessee's appeal.

6. In the ground no.3, the issue involved is sustaining the addition of

Rs.9,84,206/- on account of commission invoking the provisions of section

40(a)(i) of the Income-tax Act, 1961. Since the assessee had paid overseas 3 ITA No.741/Del./2013

commission to M/s. New Times International Ltd., Taiwan where no TDS

was deducted. As per revenue, whole amount of commission is to be

disallowed u/s 40(a)(i) of the Act. As per assessee, it has taken help of

overseas agents to procure export orders. The commission paid to such

overseas agent. At the outset of the hearing, ld. AR submitted that the

issue is covered in favour of the assessee as, on similar facts involved, the

issue has been decided in favour of assessee by Hon'ble Delhi High Court

in the case of CIT vs. EON Technology (P) Ltd. Reported in 246 CTR

(Delhi) 40 and also by the decision of Hon'ble Madras High Court in the

case of CIT vs. Faizan Shoes (P) Ltd reported in (2014) 48 Taxmann.com

48 (Madras).

7. We have heard both the sides on the issue. After hearing both the

sides and going through the aforesaid decisions of Hon'ble High Court in

the case of CIT vs. EON Technology (P) Ltd., we find that the facts of the

assessee's case are similar to the case of CIT vs. EON Technology (P)

Ltd., where, in similar circumstances, the Hon'ble High Court has held that

no TDS liability arises on the assessee. The relevant part of the order is

reproduced as under :-

"10. For the said provision to apply, the Assessing Officer was required to examine whether the said commission income is accruing or arising directly or indirectly from any business connection in India. The Assessing Officer has not dealt with or examined the said aspect but has merely recorded that the payment made to ETUK was taxable in India because of its "business connection". The Assessing Officer did not elaborate or has not discussed on what basis he had come to the conclusion that "business connection" as envisaged under Section 4 ITA No.741/Del./2013

9(1)(i) existed. On this aspect, we may note that the respondent assessee had submitted that ETUK was a non resident company and did not have any permanent establishment in India. ETUK was not rendering any service or performing any activity in India itself. These facts are not and cannot be disputed. Explanation 2 has not been invoked or relied upon by the Revenue. Factual matrix in respect of Explanation 2 has not been referred to or examined by the Assessing Officer and is not on record.

11. Commissioner of Income Tax (Appeals) relied upon two circulars issued by the Central Board of Direct Taxes being Circular No. 23 dated 23rd July, 1969 and Circular No. 786 dated 7th February, 2000, reported in [2000] 241 ITR 132 (St.). The relevant portion of the said circulars, for the sake of convenience are quoted below:-

Circular No.23 dated 23.07.1969

"Foreign Agents of India Exports-Where a foreign agents of India exporter operates in his own country and 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"

Circular No.786 dated 07.02.2000

"As clarified earlier in circular No.23 dated 23-7-1969 (see under section (5) where the non-resident agent operates outside the country, no part of his income arises in India, and since the payment is usually remitted directly abroad, it cannot be held to have been received by or on behalf of agent in India. Such payments were therefore, held to be not taxable in India. This clarification still prevails. In view of the fact that the relevant sections [section 5(2) and section 9] have not undergone and change in this regard. No tax is therefore deductible under section 195 from export commission and other related charges payable to such a non-resident for services rendered outside India."

12. On the said aspect we may refer to the decision of the Supreme Court in C.I.T. vs. Toshoku Limited, (1980) 125 ITR 525 (SC). This case relates to the assessment year 1962-63. The Indian assessee had paid commission to two foreign companies through whom they had procured export orders. Questions arose; what was the effect of the entries in the books of accounts 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. Two contentions were rejected by the Supreme Court inter- alia recording 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 5 ITA No.741/Del./2013

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 cl. (a) of the Explanation to s.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."

13. The aforesaid decision is a complete answer to the contention raised by the Revenue and as mentioned in the assessment order that commission income had accrued and arisen in India when credit entries were made in the books of the respondent assessee in favour of the ETUK and the said income towards commission was received in India. As noticed above, the stand of the Revenue is contrary to the two circulars issued by the CBDT in which it is clearly held that when a non-resident agent operates outside the country no part of his income arises in India, and since payment is remitted directly abroad, and merely because an entry in the books of accounts is made, it does not mean that the non-resident has received any payment in India. This fact alone does not establish business connection. In Circular No.786 dated 7th February, 2000, it has been stated that in such cases, the Indian assessee is not liable to deduct TDS under Section 195 of the Act from the commission and other related charges payable to such a non- resident having rendered service outside India.

14. The term "business connection" has been interpreted by the Supreme Court to mean something more than mere business and is not equivalent to carrying on business, but a relationship between the business carried on by a non-resident, which yields profits and gains and some activities in India, which contributes directly or indirectly to the earning of those profits or gains. It predicates an element of continuity between the business of the non-resident and the activity in India [CIT Vs. R.D. Aggarwal and Company (1965) 56 ITR 20 (SC), Carborandum & Co. Vs. CIT (1977) 2 SCC 862 and Ishikawajma- Harima Heavy Industries ltd. Vs. Director of income Tax, Mumbai (2007) 3 SCC 481]. The test which is to be applied is to examine the 6 ITA No.741/Del./2013

activities in India and whether the said activities have contributed to the business income earned by the non-resident, which has accrued, arisen or received outside India. The business connection must be real and intimate from which the income had arisen directly or indirectly. The question of business connection, therefore, has to be decided on facts found by Assessing Officer (or in the appellate proceedings). In the present case, facts found by the Assessing Officer do not make out a case of business connection as stipulated in Section 9(1) (i) of the Act. There is hardly any factual discussion on the said aspect by the Assessing Officer. He has not made any foundation or basis for holding that there was business connection and, therefore, Section 9(1)(i) of the Act is applicable. Appellate authorities, on the basis of material on record, have rightly held that "business connection" is not established.

15. The scope and ambit of Section 195 of the Act has been explained by the Supreme Court in GE India Technology Centre (P) Ltd. vs. CIT (2010) 327 ITR 456. In the said case the expression "any other sum chargeable under the provisions of the Act" in Section 195 of the Act was elucidated and explained. It was held that if payment is made in respect of the amount which is not chargeable to tax under the provisions of Act, tax at source (TDS, for short) is not liable to be deducted. Decision of Supreme Court in Transmission Corporation of Andhra Pradesh vs. CIT, (1999) 239 ITR 587 (SC), operates and is applicable when the sum or payment is chargeable to tax under the provisions of the Act. In such cases, TDS has to be deducted on the gross amount of payment made and not merely on the taxable income included in the gross amount. The said decision would not apply in case payment is made but the said sum in entirety is not chargeable or exigible to tax under the provisions of the Act. The said distinction has been rightly understood by the first appellate authority and the ITAT and correctly applied by them.

16. It will be appropriate to refer to the following observations of the Supreme Court in the Commissioner of Income Tax, New Delhi Vs. Eli Lilly and Company (India) Private Ltd., (2009) 15 SCC 1, wherein it has been observed :-

"60. Under the 1961 Act, total income for the previous year is chargeable to tax under Section 4. Section 4(2) inter alia provides that in respect of income chargeable under Section 4(1), income tax shall be deducted at source where it is so deductible under any provision of the 1961 Act. Section 192(1) falls in the machinery provisions. It deals with collection and recovery of tax. That provision is referred to in Section 4(2). Therefore, if a sum that is to be paid to the non-resident is chargeable to tax, tax is required to be deducted. The sum which is to be paid may be income out of different heads of income mentioned in Section 14, that is to say, income from salaries, income from house property, profits and gains of business, capital gains and income from other sources.

7 ITA No.741/Del./2013 61. The scheme of the TDS provisions applies not only to the amount paid, which bears the character of "income" such as salaries, dividends, interest on securities, etc. but the said provisions also apply to gross sums, the whole of which may not be income or profits in the hands of the recipient, such as payment to contractors and subcontractors.

62. The purpose of TDS provisions in Chapter XVII-B is to see that the sum which is chargeable under Section 4 for levy and collection of income tax, the payer should deduct tax thereon at the rates in force, if the amount is to be paid to a non-resident. The said TDS provisions are meant for tentative deduction of income tax subject to regular assessment. (See Transmission Corpn. of A.P. Ltd. v. CIT, SCC pp. 273-74, para 10 : ITR pp. 594-95.)"

(emphasis supplied)

It was thereafter lucidly clarified:-

"73. On the question as to whether there is any interlinking of the charging provisions and the machinery provisions under the 1961 Act, we may, at the very outset, point out that in CIT v. B.C. Srinivasa Setty this Court has held that :

"10. ... the charging section and the computation provisions together constitute an integrated code. When there is a case to which the computation provisions cannot apply at all, it is evident that such a case was not intended to fall within the charging section."

We may add that, the 1961 Act is an integrated code and, as stated hereinabove, Section 9(1) integrates the charging section, the computation provisions as well as the machinery provisions. (See Section 9(1)(i) read with Sections 160, 161, 162 and 163.)

74. In the present case, it has been vehemently urged that TDS provisions being machinery provisions are independent of the charging provisions whereas as held by this Court in B.C. Srinivasa Setty, the 1961 Act is an integrated code.

75. To answer the contention herein we need to examine briefly the scheme of the 1961 Act. Section 4 is the charging section. Under Section 4(1), total income for the previous year is chargeable to tax. Section 4(2) inter alia provides that in respect of income chargeable under subsection (1), income tax shall be deducted at source whether it is so deductible under any provision of the 1961 Act which inter alia brings in the TDS provisions contained in Chapter XVII-B. In fact, if a particular income falls outside Section 4(1) then TDS provisions cannot come in.

8 ITA No.741/Del./2013 76. Under Section 5, all residents and non-residents are chargeable in respect of income which accrues or is deemed to accrue in India or is received in India. Nonresidents who are not assessable in respect of income accruing and received abroad are rendered chargeable under Section 5(2)(b) in respect of income deemed by Section 9 to accrue in India."

(emphasis supplied)

17. After referring to Eli Lilly (supra) in GE India Technology Centre Private Limited (supra), it has been held :

"17. Section 195 appears in Chapter XVII which deals with collection and recovery. As held in CIT v. Eli Lilly & Co. (India) (P) Ltd. the provisions for deduction of TAS which is in Chapter XVII dealing with collection of taxes and the charging provisions of the IT Act form one single integral, inseparable code and, therefore, the provisions relating to TDS applies only to those sums which are "chargeable to tax" under the IT Act. It is true that the judgment in Eli Lilly was confined to Section 192 of the IT Act. However, there is some similarity between the two. If one looks at Section 192 one finds that it imposes statutory obligation on the payer to deduct TAS when he pays any income "chargeable under the head 'Salaries'". Similarly, Section 195 imposes a statutory obligation on any person responsible for paying to a non-resident any sum "chargeable under the provisions of the Act", which expression, as stated above, does not find place in other sections of Chapter XVII. It is in this sense that we hold that the IT Act constitutes one single integral inseparable code. Hence, the provisions relating to TDS applies only to those sums which are chargeable to tax under the IT Act.

18. If the contention of the Department that any person making payment to a non-resident is necessarily required to deduct TAS 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. Section 237 read with Section 199 implies that only the recipient of the sum i.e. the payee could seek a refund. It must therefore follow, if the Department is right, that the law requires tax to be deducted on all payments. The payer, therefore, has to deduct and pay tax, even if the so-called deduction comes out of his own pocket and he has no remedy whatsoever, even where the sum paid by him is not a sum chargeable under the Act. The interpretation of the Department, therefore, not only requires the words "chargeable under the provisions of the Act" to be omitted, it also leads to an absurd consequence. The interpretation placed by the Department would result in a situation where even when the income has no territorial nexus with India or is not chargeable in India, the Government would nonetheless collect tax. In our view, Section 195(2) provides a remedy by which a person may 9 ITA No.741/Del./2013

seek a determination of the "appropriate proportion of such sum so chargeable" where a proportion of the sum so chargeable is liable to tax."

18. In view of the aforesaid discussions, it has to be held that there is no error in the findings recorded by the Commissioner of Income Tax (Appeals) which have been upheld in the impugned order by the ITAT. We do not find any merit in the present appeal and the same is dismissed. No costs."

Facts remain the same, respectfully following the aforesaid order, we allow

this ground of assessee's appeal.

8. In the result, the appeal of the assessee is allowed.

Order pronounced in open court on this 9th day of January, 2015.

Sd/- sd/- (DIVA SINGH) (B.C. MEENA) JUDICIAL MEMBER ACCOUNTANT MEMBER

Dated the 9th day of January, 2014 TS

Copy forwarded to: 1.Appellant 2.Respondent 3.CIT 4.CIT(A)-X, New Delhi. 5.CIT(ITAT), New Delhi. AR, ITAT NEW DELHI.