Welspring Universal, New Delhi vs Assessee

passed by the CIT u/s 263 of the Income-tax Act, 1961 (hereinafter

also called 'the Act') on 8.7.14 in relation to the assessment year

2011-12.

ITA No.4761/Del/2014

2. Briefly stated, the facts of the case are that the assessee is

engaged in manufacturing of engineering items. The AO observed

during the course of assessment proceedings that a sum of `

23,58,813/- was paid by the assessee as a foreign commission

without deduction of tax at source. On being called upon to justify

such non-deduction, the assessee tendered explanation which has

been reproduced on pages 2-4 of the assessment order. Getting

convinced with the assessee's submissions, the AO chose not to

make any disallowance u/s 40(a)(i) of the Act. While exercising

revisional power u/s 263 of the Act, the ld. CIT opined that in view

of the amendment to section 195, the assessee was liable to

deduct tax at source on such payment of commission to foreign

parties. Having not done so, the ld. CIT held that the assessment

order passed by the AO on this score was erroneous and

prejudicial to the interests of the Revenue. In support of his

conclusion, the ld. CIT also relied on the opinion of the Authority of

Advance Ruling in SKF Boilers and Driers Pvt. Ltd. (343 ITR 385)

and Rajiv Malhotra (285 ITR 564). The assessee is aggrieved

against the revisional order directing the AO to make disallowance

u/s 40(a)(i) of the Act.

2 ITA No.4761/Del/2014

3. We have heard the rival submissions and perused the

relevant material on record. There is no dispute on the factual

aspect of the matter that the assessee paid commission to a non-

resident for procuring export orders and such commission was

paid without deducting tax at source. The assessee pleaded for

the correctness of its action in not making such deduction u/s 195

by stating that the non-resident commission agent provided

services outside India and, hence, the amount was not chargeable

to tax in his hands. It goes without saying that liability for

deduction of tax at source arises only when the amount is

chargeable to tax in the hands of the payee. If the amount itself is

not so chargeable to tax, the liability for deduction of tax at source

is also obliterated.

4. Firstly, we will endeavour to determine if the amount of

commission is taxable in the hands of the non-resident agent. The

scope of total income of a non-resident is governed by section 5(2)

of the Act. This section provides that all income of a non-resident

from whatever source derived which (a) is received or is deemed

to be received in India in such year by or on behalf of such person

or (b) accrues or arises or is deemed to accrue or arise to him in 3 ITA No.4761/Del/2014

India during such year, shall be included in his total income. It is

patent that the non-resident did not receive such income in India

inasmuch as the assessee made payment for such commission to

the non-resident outside India. Section 7 defines 'Income deemed

to be received'. It refers to the annual accretion to the balance at

the credit of an employee participating in a recognized provident

fund; transferred balance in a RPF to some extent; and the

contribution made by the Central Government or any other

employer to the account of an employee under Pension Scheme

referred to in section 80CCD. From the description of the contents

of section 7, it can be seen that the commission received by a

non-resident cannot be characterized as 'income deemed to be

received' in India. The next ingredient of section 5(2) is the

income which 'accrues or arises in India.' Since the chargeability

to tax under this segment is attracted if the income accrues or

arises to the non-resident in India, it becomes crucial to find out

the place where income from export commission accrues or arises.

In this regard, the source of accrual or arising of income cannot be

relevant because the incidence of tax is attached with the place of

accrual of income and not its source. Ordinarily, there can be

4 ITA No.4761/Del/2014

several places involved in a transaction, such as, a place where an

agreement is entered into or a place where services are actually

performed or a place where the services are utilized or a place

where entries are made in the books or a place where

consideration is paid or received etc. In the context of rendering of

services for procuring export orders by a non-resident from the

countries outside India, there can be no way for considering the

actual export from India as the place for the accrual of commission

income of the non-resident. One should keep in mind the

distinction between the accrual of income of exporter from exports

and that of the foreign agent from commission. As a foreign agent

of Indian exporter operates outside India for procuring export

orders and further the goods in pursuance to such orders are also

sold outside India, no part of his income can be said to accrue or

arise in India. The last component of section 5(2) is income which

'is deemed to accrue or arise' in India. The expression - 'Income

deemed to accrue or arise in India' - has been defined in section

9(1) of the Act. Sub-section (1) of section 9 has seven clauses.

Clause (i) deals with income accruing or arising, whether directly

or indirectly, through or from any business connection in India or

5 ITA No.4761/Del/2014

from any property in India or through or from any asset or source

of income in India or through the transfer of the capital asset

situated in India. It is quite apparent that the commission income

cannot be associated with the later contents of this clause,

namely, any property or asset or source of income in India. At the

most, it can be considered as having some 'business connection.'

Explanation 3 to section 9(1)(i) provides that if business is carried

on in India, only so much of the income as is attributable to the

operations carried out in India, shall be deemed to accrue or arise

in India. Thus, it is clear that in order to bring any income within

the ambit of section 9(1)(i), it is sine qua non that the activity

resulting into such income should be carried out in India.

Notwithstanding the existence of a business connection in India,

as even understood in the widest possible amplitude, an income

will fall u/s 9(1)(i) only to the extent it results from the operations

carried out in India. If no operations for earning such income from

business connection are carried out in India, the applicability of

clause (i) to this extent is ruled out. As, admittedly, the non-

resident payee carried out his operations outside India, the

command of clause (i) of section 9(1) cannot apply. The other six

6 ITA No.4761/Del/2014

clauses of section 9(1), namely, clauses (ii) & (iii) dealing with

income under the head 'Salaries'; clause (iv) dealing with

'Dividend'; clause (v) dealing with 'Interest'; clause (vi) dealing

with 'Royalty'; and clause (vii) dealing with 'Fees for technical

services', have no application to the facts and circumstances of

the instant case. The amount of commission paid to the non-

resident cannot be described as salary or dividend or interest or

royalty or fees for technical services.

5. The argument of the ld. DR that Explanation below section

9(2) will bring the instant case within the fold of section 9(1), is

devoid of any merit. This Explanation simply states that for the

purposes of this section, income of a non-resident shall be

deemed to accrue or arise in India under clauses (v) or (vi) or (vii)

of sub-section (1) and shall be included in the total income of the

non-resident whether or not the non-resident has a residence or

place of business or business connection in India or the non-

resident has rendered services in India. A bare perusal of the

Explanation divulges that if there is some income of the non-

resident which is in the nature of interest or royalty or fees for

technical services, then, such income shall be deemed to accrue 7 ITA No.4761/Del/2014

or arise in India irrespective of the non-resident rendering services

in or outside India etc. The pre-condition for magnetizing this

Explanation is that the income of the non-resident should be in the

nature of interest or royalty or fees for technical services. It is

only in respect of these three categories of incomes that the

deeming provision is attracted notwithstanding the non-resident

not having a place of business in India or not rendering services in

India. As the commission income of non-resident does not fall in

any of these three clauses, namely, (v), (vi) or (vii) of section 9(1)

of the Act, we hold that Explanation below section 9(2) cannot

help the Revenue's case.

6. In view of the foregoing discussion, it is apparent that the

commission income in the hands of the non-resident can neither

be considered as received or deemed to be received in India or

accruing or arising or deemed to accrue or arise to him in India in

terms of section 5(2) of the Act. Once it is held that the

commission income of a non-resident for rendering services

outside India does not fall within the scope of his total income, it

automatically implies that the same is not chargeable to tax in his

hands.

8 ITA No.4761/Del/2014

7. Sub-section (1) of section 195 provides that any person

responsible for paying to a non-resident, not being a company, or

to a foreign company, any interest or any other sum chargeable

under the provisions of this Act, not being income chargeable

under the head 'Salaries' shall, at the time of credit of such

income to the account of the payee or at the time of payment

thereof, whichever is earlier, shall deduct income-tax thereon at

the rates in force. A circumspection of this provision indicates that

in order to attract the withholding of tax on a payment made to a

non-resident, it is essential that the sum should be chargeable to

tax in the hands of the payee under the provisions of this Act. It is

quite natural also because a liability for deduction of tax at source

pre-supposes tax liability in the hands of the payee. If there is no

tax liability in respect of the payments made to the payee, there

can be no question of deducting any income-tax at source from

such payment. Only if the amount is chargeable to tax in the

hands of the recipient that the question of deducting any tax at

source therefrom arises. In an earlier para, we have seen that the

export commission is not chargeable to tax in the hands of non-

resident in terms of section 5(2) of the Act. The natural outcome,

9 ITA No.4761/Del/2014

which, therefore, emerges is that there can be no obligation of the

assessee-payer to deduct tax at source on such commission

payment to the non-resident.

8. Now, we turn to the amendment to section 195, which has

been invoked by the ld. CIT to fortify his view that the assessee

was required to deduct tax at source before making payment of

commission to the non-resident. Before evaluating such a

submission, it would be apposite to consider the prescription of

the Explanation 2, as under:-

"Explanation 2.--For the removal of doubts, it is hereby clarified that the obligation to comply with sub-section (1) and to make deduction thereunder applies and shall be deemed to have always applied and extends and shall be deemed to have always extended to all persons, resident or non-resident, whether or not the non-resident person has--

(i) a residence or place of business or business connection in India; or

(ii) any other presence in any manner whatsoever in India."

9. A glance at the above Explanation inserted by the Finance

Act, 2012 with retrospective effect from 1.4.1962 reveals that the

obligation to comply with sub-section (1), for making deduction of

tax at source by the payer, applies and shall be deemed to have

10 ITA No.4761/Del/2014

always applied to all the persons, resident or non-resident,

whether or not the non-resident person has a residence or place of

business or business connection in India or any other presence in

any manner whatsoever in India. The Explanation simply clarifies

that the obligation to deduct tax at source in terms of section

195(1) is not restricted only to the residents, but also extends to

the non-residents irrespective of such non-resident not having a

place of business or a business connection in India etc. Since the

main part of sub-section (1) of section 195 casts obligation for

withholding of tax at source on the payer, thus, it becomes

axiomatic that the Explanation 2 amplifying the scope of sub-

section (1) of section 195 shall also apply to a payer and not a

payee. As the extant assessee payer is a resident of India, it is

even otherwise obliged to deduct tax at source from the payments

made to non-resident in terms of the main sub-section (1), without

applicability of the Explanation 2, if the requisite conditions as

prescribed in the section are fulfilled. In other words, if a payment

is made on account of any sum which is chargeable under the

provisions of this Act, then, there will be an obligation to deduct

tax at source. Per contra, if the amount is not chargeable to tax in

11 ITA No.4761/Del/2014

the hands of the payee, then, no liability to deduct tax at source

can be fastened on the payer. Thus it is vivid that the insertion of

the Explanation 2 has not brought any change to the factual

position obtaining before us. The effect of insertion of Explanation

to section 195(1) is simply to clarify about liability of deductor. It

has not done away with the pre-requisite condition of section

195(1) which mandates that amount should be chargeable to tax

in the hands of the payee. In our considered opinion, the ld. CIT

erred in invoking Explanation 2 to section 195(1) for treating the

assessment order erroneous and prejudicial to the interest of the

Revenue on account of non deduction of tax at source from the

commission payment to the non-resident and the consequential

non-making of disallowance u/s 40(a)(i) of the Act.

10. The ld. DR vehemently accentuated on Circular no. 7 of

2009 to contend that with the withdrawal of the earlier benevolent

circulars on this issue, the instant commission payment has

become chargeable to tax in the hands of the payee and in the

absence of the assesee having deducted tax at source, the ld. CIT

was justified in setting aside the assessment order allowing

deduction for such commission payment.

12 ITA No.4761/Del/2014

11. We do not find any force in this argument. It is relevant to

note that Circular no 23 dt. 23/07/1969 clarified that no part of the

income of a foreign agent of Indian exporter arises in India and

hence such an agent is not liable to income-tax in India on the

commission. Then circular no. 786 dt. 7/02/2000 further

elaborated the consequence of Circular no. 23 by stating that

since such commission income of foreign agent is not liable to tax

in India, no tax is therefore, deductible at source under section

195 and consequently the export commission payable to a non-

resident for services rendered outside India is not disallowable u/s

40(a)(i) of the Act. Thereafter, Circular no. 7 dated 22/10/2009

was issued withdrawing, inter alia, the above two circular nos. 23

and 786. The legal position contained in section 5(2) read with

section 9, as discussed above about the scope of total income of a

non-resident subsisting before the issuance of circular nos. 23 and

786 or after the issuance of circular no. 786 has not undergone

any change. It is not as if the export commission income of a

foreign agent for soliciting export orders in countries outside India

was earlier chargeable to tax, which was exempted by the CBDT

through the above circulars and now with the withdrawal of such

13 ITA No.4761/Del/2014

circulars, the hitherto income not chargeable to tax, has become

taxable. The legal position remains the same de hors any circular

inasmuch as such income of a foreign agent is not chargeable to

tax in India because it neither arises in India nor is received by

him in India nor any deeming provision of receipt or accrual is

attracted. It is further relevant to note that the latter Circular

simply withdraws the earlier circular, thereby throwing the issue

once again open for consideration and does not state that either

the export commission income has now become chargeable to tax

in the hands of the foreign residents or the provisions of section

195 read with sec. 40(a)(i) are attracted for the failure of the

payer to deduct tax at source on such payments.

12. Ex consequenti, we hold that the amount of commission

income for rendering services in procuring export orders outside

India is not chargeable to tax in the hands of the non-resident

agent and hence no tax is deductible under section 195 on such

payment by the payer. Resultantly, no disallowance is called for

u/s 40(a)(i) of the Act.

14 ITA No.4761/Del/2014

13. It can be seen that the ld. CIT relied on two decisions of the

Authority of Advance Ruling in SKF Boilers & Driers (supra) and

Rajiv Malhotra (supra). It is correct that at least in SKF Boilers

(supra), the Authority has held that the payment of commission

on export orders is chargeable to tax u/s 5(2)(b) read with section

9(1)(i) of the Act. By an independent evaluation of the matter in

the light of the provisions of section 5(2) read with section 9 of the

Act, we have held above that the foreign commission is not

chargeable to tax in the hands of the non-resident. Be that as it

may, it is important to note that it is not a solitary precedent

available on the subject. The Hon'ble jurisdictional High Court in

Director of Income-tax (International Taxation) vs. Panalfa Auto

Elektrik Ltd. (2004) 272 CTR (Del) 117, has held that the services

rendered by non-resident agent for procuring export orders for the

assessee cannot be held as fees for technical services u/s 9(1)(vii)

of the Act. In this case, the assessee made an application u/s

195(2) for authorization to remit certain amount as commission for

arranging export sales and realizing payment to non-resident

company. The AO held that the commission payment was taxable

as fees for technical services u/s 9(1)(vii) of the Act. That is how,

15 ITA No.4761/Del/2014

when assailed, the Hon'ble High Court held that the payment of

commission cannot be considered as fees for technical services in

terms of section 9(1)(vii) so as to call for any deduction of tax at

source. The Hon'ble Madras High Court in CIT vs. Faizan Shoes (P)

Ltd. (2014) 272 CTR (Madras) 170, has also held that no

disallowance can be made u/s 40a(i) in respect of commission paid

to non-resident agent for providing services outside India.

14. At this juncture, it is pertinent to note that we are dealing

with an appeal against the order passed u/s 263 of the Act. It is

settled legal position that there can be no revision on a debatable

issue. The Hon'ble Supreme Court has held so in Malabar

Industrial Company Ltd. Vs. CIT (2000) 243 ITR 83 (SC). This view

has been reiterated by the Hon'ble Apex Court in CIT vs. Max India

Ltd. (2007) 295 ITR 282 (SC). In this case, the Hon'ble Summit

Court held that when two views are possible and the ITO has taken

one view with which the CIT does not agree, it cannot be treated

as an erroneous order prejudicial to the interest of the Revenue,

unless the view taken by the ITO is unsustainable in law.

Adverting to the facts of the instant case, it can be seen that the

AO, after considering certain decisions relied by the assessee 16 ITA No.4761/Del/2014

favouring non-deduction of tax at source in the present

circumstances, accepted the assessee's contention. The fact that

the decision of the Authority for Advance Ruling, relied by the ld.

CIT, favours the Revenue's case, at the maximum, makes the

issue about deduction of tax at source from foreign commission, a

debatable one. In view of such a cleavage of opinion, this

debatable issue goes outside the purview of section 263 in the

light of the above referred two Supreme Court judgments. We,

therefore, set aside the impugned order.

15. In the result, the appeal is allowed.

The order pronounced in the open court on 12.01.2015.

Sd/- Sd/-

[A.T. VARKEY] [R.S. SYAL] JUDICIAL MEMBER ACCOUNTANT MEMBER Dated, 12th January, 2015. dk Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT (A) 5. DR, ITAT

AR, ITAT, NEW DELHI. 17