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Assistant Commissioner of Income-tax, Co. Circle II (3), Chennai v/s India Shoes Exports (P.) Ltd.

    IT Appeal Nos. 1963 & 1964 (Mds.) of 2014

    Decided On, 04 February 2015

    At, Income Tax Appellate Tribunal Chennai

    By, THE HONOURABLE MR. B.R. BASKARAN
    By, ACCOUNTANT MEMBER & THE HONOURABLE S.S. GODARA
    By, JUDICIAL MEMBER

    For the Appellant: N. Madhavan, JCIT. For the Respondent: S. Srividya, CA.



Judgment Text

S.S. Godara, Judicial Member

1. These Revenue's appeals in case of different assessees for assessment year 2010-11, are directed against separate orders of the Commissioner of Income-tax (Appeals)-II Chennai dated 28.1.2014 and 20.1.2014 passed in Appeal Nos. 1852/2013-14 and 1599/2013-14 deleting disallowance u/s 40(a)(i) of Rs. 2,16,29,463 and Rs. 78,54,319/-respectively, in proceedings under section 143(3) of the Income-tax Act, 1961 (in short the 'Act').

2. The Revenue's identical grounds raised in both appeals read as under:

"2. The learned CIT(A) erred in deleting the disallowance u/s 40(a)(i) to the extent of Rs. 78,54,319/- holding that the assessee is not liable to deduct at source on the 'Export Sales Commission' payments made to the non resident u/s. 195 of the Act;

2.1 It is submitted that Section 40(a)(i) has been amended by the Finance Act, 2004 and w.e.f. 01.04.2005, and any amount payable outside India or in India to a non-resident, then such payment made without deduction of TDS cannot be allowed as a deduction while computing the profits and gains of business;

2.2 It is submitted that the Explanation 2 to Sec. 195 inserted by the Finance Act, 2012 specifically states that the income of a non-resident shall be deemed to accrue or arise in India under clause (v) or (vi) or (vii) of sub section (1) of section (9) and shall be included in his total income whether or not the non resident has a residence or place of business or business connection in India or has rendered services in India;

2.3 The Ld CIT(A) ought to have appreciated that the decision of the Apex Court in the case of Transmission Corpn. A.P. Ltd. [1999] 239 ITR 587 (SC) clearly held that TDS should be effected at

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the rates in force, if the amount is paid to a non-resident. The rights of the payee or the recipient are fully safeguarded under sections 195(2), 195(3) and 197 of the Act;

2.4 The Id. CIT(A) failed to appreciate the fact that the assessee has not obtained certificate u/s.195(2) of the Act to be exempt from the purview of TDS and hence the AO has rightly disallowed the overseas Commissioner paid to foreign agents, u/s 40(a)(i) of the I.T. Act;

2.5 It is submitted that as per Explanation inserted by the Finance Act 2010 with retrospective effect from 1.6.1976, payments of this nature are taxable in India irrespective of the PE of the non resident and also the place in which the service was rendered;

2.6 The Id. CIT (A) failed to appreciate this issue in the light of the DTAA as the nature of services that need to suffer withholding of tax should be viewed depending upon the nature of services and the country of residence of the non-resident;

2.7 It is submitted that the decision of the Hon'ble ITAT in ITA No 359/Mds/2013 dt.11.04.2013 for AY 2008-09 in the case of M/s Farida Shoes Pvt Limited relied on by the CITCA), has not reached finality and appeals before the Hon'ble High Court is pending."

Parties inform us that the sole identical issue involved in both these cases is deletion of disallowance u/s 40(a)(i)of the Act Therefore, we treat I.T.A.No.1964/Mds/2014 in case of ISIS Exports (P.) Ltd. as the 'lead' case.

3. The assessee manufactures shoe leather socks, handbags and key chains. It had filed its return on 15.10.201 admitting income of Rs. 13,19,550/-. The same was 'summarily' processed. The Assessing Officer took up 'scrutiny'. He noticed from the assessee's profit and loss account the impugned sum of Rs. 78,54,319/-classified as commission on export sales without deducting TDS. The said agents are based in Italy, Spain, France and Germany. The Assessing Officer sought to invoke disallowance u/s 40(a)(i). The assessee pleaded that no TDS was required to be deducted since the impugned export commission had not accrued/arisen in India as the services had been rendered in foreign shores. The commission payments were also claimed to have been directly remitted. The Assessing Officer did not agree. He went through the assessee's agreements with the aforesaid payees and observed that they not only sourced export orders but also identified its customers based on matters of interest in the territory qua its products, price levels, competition, market situation and related suitable forecasts requiring special technical knowledge, experience, skill and know-how. He referred to various Double Taxation Avoidance Agreements (DTAAs) defining fee for technical services. Section 9(1)(vii) pertaining to fee for technical services was quoted. The Assessing Officer opined in light thereof that assessee's export business had to be construed as 'source' from which commission income in question is earned and the same is situated in India. He proceeded on this reasoning and invoked section 40(a)(i) to disallow the impugned commission payments of Rs. 78,54,319/-.

4. The CIT(A) has accepted the assessee's corresponding ground as under:

'4.1.2 I have considered the assessee's submissions as well as the orders of the Hon'ble ITAT in the cases of M/s. Farida Shoes P Ltd (ITA No.159/Mds/2013 dated 11.04.2013 for A.Y. 2008-09) and M/s. Delta Shoes P Ltd (ITA No.909/Mds/2013 dated 31.07.2013) etc. The facts involved in the cases of M/s. Farida Shoes P Ltd and M/s. Delta Shoes P Ltd, are exactly similar to those involved in the present assessee. In the said cases (i.e. Farida Shoes P Ltd and Delta Shoes P Ltd) the payments made to the non-residents, without making TDS, were similar to those made by the present assessee company. The Assessing Officer disallowed the said payments u/s.40(a)(i) for non-deduction of TDS u/s.195 of the Act. The CIT(A) allowed the appeals of the said companies. The Revenue preferred an appeals to the ITAT against the orders of the CIT(A). The Hon'ble Income Tax Appellate Tribunal of Chennai, vide its orders mentioned above, has held that the services provided by the concerned non-residents neither amounts to managerial/technical services nor the payments are assessable to tax in India and hence the provisions of sec.195 of the Act are not applicable to the facts of the said companies. The relevant portion of the order of the ITAT (in ITA No.159/Mds/2013 dated 11.04.2013 for A.Y. 2008-09 in the case of M/s. Farida Shoes P Ltd) is reproduced as under:

"10. We have heard both sides, perused the materials available on record and case law cited. In this case, the assessee has made certain payments to overseas agents as commission and no TDS deducted. According to the Assessing Officer, the assessees' business is situated in India and the payments were also made from India and according to section 195, the assessee is under obligation to deduct TDS. Therefore, by invoking section 40(a)(i), he has disallowed an amount of Rs. 5, 62,13,826/- On appeal, the CIT(Appeals) deleted the disallowance on the ground that the commission was paid to non-resident agent and it cannot be said to have been accrued in India and section 195 have no application. The only issue for our consideration is as to whether the assessee is under obligation to deduct the TDS under section 195 or not. The CIT(Appeals), by considering the entire facts and circumstances of the case passed a detailed order by observing that section 195 have no application to assessee's case. In the case of M/s. Prakash Impex v. ACIT (supra), the Coordinate Bench of ITAT Chennai has considered the very same issue and observed that the commission paid to non-resident agent for the services rendered outside India and such payments are not chargeable to tax India and therefore, the provisions of section 195 are not applicable view of the decision of the Hon'ble Supreme Court in the case of G E India Technology Centre P. Ltd. v. CIT (supra).

11. In the case of CIT v. EON Technology (P) Ltd., the Hon'ble Delhi High Court has also 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 adder 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 therefrom 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]."

12. The Hon'ble Delhi High Court has considered the decision of the Hon'ble Supreme Court in the case of M/s. Transmission Corporation of Andhra Pradesh reported in 239 ITR 587 and decided the issue in favour of the assessee.

13. In the case of Armayesh Global v. ACIT (supra), the Mumbai Bench of ITAT has observed that the commission payment was made to the overseas agent for procuring export orders. The agents have not been provided any managerial/technical services. The relationship between the assessee and the non-resident (agent) was only for rendering non-technical services. Moreover, there was no permanent establishment of the said non-resident in India. Therefore, the commission paid to the non-resident agent did not accrue or arise in India and thus, there was no need for deducting TDS under section 195 of the Act.

14. In the present case, the assessee paid certain amounts to overseas agents for procurement of export orders. The agents have not provided any managerial/technical services. The payments received by the non-resident Indian are not taxable in India. Taking into consideration of entire facts and circumstances and by following aforesaid decisions, we are of the opinion that the issue involved in this appeal is covered in favour of the assessee and section 195 have no application to assessee's case. Accordingly, the appeal of the Revenue is dismissed."

4.1.3 In the instant case also, the assessee company is engaged in the business of exporting leather goods (in the cases of Farida Shoes P Ltd and Delta Shoes P Ltd also products exported were leather shoes/goods). As explained by the assessee, it is availing the services of non-resident agents for procuring export orders for the assessee for which it is paying commission. Perusal of the assessee's submissions shows that the said non-resident agents have no business connection in India, nor they have any permanent establishments in India. They are procuring export orders for the assessee. Thus, the said non-resident agents are operating outside the country and all the services are rendered abroad only. In other words, though the said non-residents are rendering services to the assessee (Indian company) these services are rendered totally outside the country. In such a situation the payments (commissions) made to such agents are not liable to be taxed in India.

4.1.4 The decision of Delhi Tribunal in the case of Asia Satellite Telecommunications Co. Ltd. v. Dy. CIT (85 ITD 478)(Del), relied on by the Assessing Officer in his order, is with respect to the consultancy charges. The consultancy charges are normally technical in nature, where the utilization of the services plays a crucial role in deciding the place accrual of income. In the case of commission payments, like in the present case, the services cannot be considered as "technical services". In such cases, the place of residence of the agents and the place of canvassing (marketing) is the deciding factor. The non-resident agents in the present case have canvassed for the assessee's products outside the country and obtained the sales orders etc. Hence the said decision of Delhi Tribunal is not applicable to the facts of the case.

4.1.5 TDS is required to be deducted on all payments to non-residents if the said payments are liable for tax in India. In the instant case, the commission payments to the non-resident agent are not taxable in India as the services are rendered abroad and the agents have no PE in India. Therefore, there is no requirement to deduct TDS on these payments. For this purpose reliance is also placed on the decision of Apex court in the case of GE India Technology Cen. P Ltd. v. CIT [2010] (327 ITR 456) (SC) wherein it was held as under:

* Section 195 of the Income-tax Act, 1961 - Deduction of tax at source - Payment to non-resident-

* Whether the moment a remittance is made to a non-resident, obligation to deduct tax at source does not arise; it arises only when such remittance is a sum chargeable under Act) i.e., chargeable under sections 4) 5 and 9 - Held, yes.

* Whether section 195(2) is not a mere provision to provide information to ITO(TDS) so that department can keep track of remittances being made to non-residents outside India; rather it gets attractedto cases where payment made is a composite payment in which certain proportion of payment has an element of 'income' chargeable to tax in India and payer seeks a determination of appropriate proportion of sum chargeable - Held, yes.

Further, under similar facts and circumstances, the Hon'ble ITAT of Chennai, in the case of M/s. Farida Shoes P Ltd, in ITA No.159/Mds/2013 dated 1l.04.2013 (A.Y.2008-09), has examined the issue of commission payments to non-residents for procuring export orders in detail and concluded that the commission payments to the said non-resident agents are not assessable to tax in India and consequently the resident payee company (M/s. Farida Shoes P Ltd) was not under the obligation of deduction TDS on the commission payments u/s.195 of the Act.

4.1.6 In the present appeals of the assessee also the facts and circumstances are exactly identical to those involved in the case of M/s. Farida Shoes P Ltd and M/s. Delta Shoes P Ltd. Therefore, since the issue involved in the present appeals is the same and the facts are exactly identical, the above decision of the ITAT, (M/s. Farida Shoes P Ltd, in ITA No.159/Mds/2013 dated 11.04.2013), is equally applicable to the facts of the present assessee also. Therefore, respectfully following the decision of ITAT, in the case of M/s. Farida Shoes P Ltd (in ITA No.159/Mds/2013 dated 11.04.2013), I hold that the above transactions of "Export Sales Commission" payments to the non-residents for procuring export orders, are not assessable to tax in India and consequently the assessee company is not under any obligation to deduct the TDS on the above commission payments ix] s.195 of the Act. The provisions of sec.40(a)(i) have no application in the present case. Accordingly, the additions made by the Assessing Officer, on account of disallowance of "Export Sales Commission" payments of Rs.78,54,319/- for non-deduction of TDS u/s40(a)(i) r.w.s. 195 of the Act, are not justified and deleted.'

Therefore, the Revenue is in appeal.

5. We have heard both parties and gone through the case file. The only issue for our consideration is as to whether the assessee's commission payments made to its overseas agents in lieu of procuring export orders amount to 'fee for technical services' or not u/s 9(1)(vii) of the Act. In our view, section 9(1)(vii)(b) has to be taken as part of section 9(1)(vii). Once the former provision stipulating fee for technical services itself is not applicable, latter limb cannot be invoked in isolation. We make it clear that there is no evidence placed on record proving any 'technical services' element in procurement of export orders. It is evident that the assessee's overseas export agents have merely collected export orders in lieu of direct remittances. We find that the hon'ble jurisdictional high court in CIT v. Faizan Shoes (P.) Ltd. [2014] 367 ITR 155/226 Taxman 115/48 taxmann.com 48 (Mad.) has held in identical circumstances that such an export commission payment does not amount to 'fee for technical services'. The Revenue heavily relies on the case law of Transmission Corpn. of Andhra Pradesh v. CIT [1999] 239 ITR 587/105 Taxman 742 (SC). The Hon'ble apex court has itself distinguished the said case law in GE India Technology Cen. (P.) Ltd. v. CIT [2010] 327 ITR 456/193 Taxman 234/7 taxmann.com 18 in clear terms that section 195 would only apply if the payment in question is taxable as income in India and not otherwise. The said issue stands already decided against the Revenue. Therefore, we uphold the CIT(A)'s order and reject the Revenue's grounds.

The Revenue's appeal I.T.A.No.1964/Mds/2014 is dismissed.

6. Same order to follow in I.T.A.No.1963/Mds/2014.

7. Both these Revenue's appeals are dismissed.
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