ITA Nos. 508 and 197/Ahd/2016. Case: Dy. Commissioner of Income Tax, Circle 2(1)(1) Vs Elitecore Technologies Private Limited. ITAT (Income Tax Appellate Tribunal)

Case NumberITA Nos. 508 and 197/Ahd/2016
CounselFor Appellant: S.N. Soparkar, Senior Advocate and Bandish Soparkar and Parin Shah, Advs. and For Respondents: Byomkesh Panda, Adv.
JudgesPramod Kumar, Member (A) and S.S. Godara, Member (J)
IssueCompanies Profits Surtax Act 1964 - Section 4; Constitution Of India - Article 141; Income Tax Act, 1961 - Sections 115WA, 139(1), 143(3), 144, 145, 145(1), 195, 195(2), 2, 2(24)(x), 2(43), 2(433), 245S, 256(1), 256(2), 260A, 28, 28(i), 29, 30, 31, 32, 33, 34, 35, 36, 30, 31, 32, 33, 34, 35, 36, 37, 38, 30, 31, 32, 33, 34, 35, 36, 37, 38, 39, 3...
Judgement DateMarch 31, 2017
CourtITAT (Income Tax Appellate Tribunal)


Pramod Kumar, Member (A), (ITAT Ahmedabad 'I' Bench)

  1. These cross appeals are directed against the order dated 29th December 2015 passed by the CIT(A) in the matter of assessment under section 143(3) of the Income Tax Act, 1961, for the assessment year 2012-13. Both of these appeals are being disposed of, as a matter of convenience, by this consolidated order.

  2. In the appeal filed by the revenue, three grievances are raised-first, against the CIT(A) deleting the disallowance of Rs. 65,96,434 on account of commission paid to the non-residents; second, against the CIT(A) deleting the disallowance of Rs. 60,48,228 on account of provision for warranty; and, third-against the CIT(A) restricting the disallowance of foreign tax credit of Rs. 3,10,799 and directing the balance unallowed foreign tax credit of Rs. 52,50,507 to be allowed as deduction under section 37(1).

  3. In ground No. 1, in the appeal filed by the revenue, this grievance of the Assessing Officer is as follows:

    The Ld. CIT(A) has erred in law and on facts in deleting the disallowance made by the AO on account of commission paid to non-residents amounting to Rs. 65,96,434/-, without properly appreciating the facts of the case and the material brought on record.

  4. So far as this ground of appeal is concerned, the relevant material facts are like this. The assessee before us is engaged in the business of developing software products. During the course of the assessment proceedings, the Assessing Officer noticed that the assessee has paid commission of Rs. 1,02,33,461 for procuring the business, out of which Rs. 65,96,434 were paid to non-resident agents. It was also noticed that no tax was withheld from the payments made to non-resident commission agents. On an examination of the supporting evidences furnished by the assessee, the Assessing Officer was not satisfied with genuineness of the commission payment mainly on the ground that there was no material 'to justify the reasonableness of commission payment to non-resident' and 'evidences pertaining to services rendered by the foreign commission agent having nexus with assessee's business' was not available. He was also of the view that in view of the provisions of Section 9(1)(i) income of the non-resident from though or from any business connection in India or any source in India is deemed to accrue or arise in India, and under section 5(2)(b) income deemed to accrue or arise in India is also taxable in India. While he did not dispute "the agent must have rendered services abroad and have solicited orders from there", he was of the view that since right to receive commission income accrued in India, the income is deemed to accrue or arise in India. He also placed reliance on the rulings given by the Authority for Advance Ruling in the cases of Rajiv Malhotra [(2006) 284 ITR 564 (AAR)] and SKF Boilers and Driers Ltd. [(2012) 18 taxmann. 325]. It was also pointed out that the CBDT circular No. 23, holding that commission income in the hands of the non-residents is not taxable in India, stands withdrawn, and that under section 195, it was obligation of the assessee to either deduct the tax at source from foreign remittances or obtain, in case of slightest doubt, an approval of the Assessing Officer, under section 195(2), for making the remittances without any deduction of tax at source. It was thus concluded that the assessee has failed to discharge his obligations under section 195 and thus the disallowance under section 40(a)(i) comes into play. The Assessing Officer thus disallowed Rs. 65,96,434 in respect of the commission paid to non-resident commission agents. Aggrieved, assessee carried the matter in appeal before the CIT(A) who deleted the disallowance by observing as follows:

    6.5 I have carefully considered the facts of the case, assessment order and the submissions of the Appellant. The services provided by the non-resident agents are in relation to marketing of Appellants products and assisting the Appellant in procuring sales orders abroad. The copy of the invoices and the purchase orders submitted by the Appellant substantiate that the non-resident agents have done marketing and have assisted the Appellant in procuring sales orders. None of the agents are related to the Appellant and hence the contentions of the learned AO that the Appellant has not proved the genuineness as well as reasonableness of the commission payment is not acceptable. The contention of the AO that there are no agreements and hence genuineness of the payment cannot be ascertained is also not acceptable as there is no need to have an agreement for each and every situation. The non-resident agent has raised the bill on the Appellant for the services rendered. The Appellant has also submitted the purchase order for the sales undertaken through the services of the non-resident agents. The learned AO in the assessment order had concluded that the Appellant had not proved the identity, evidences of the services rendered and the copy of the agreements entered. On the basis of this conclusion, the learned AO made an observation that the services have not been rendered and the payments are not genuine. Against this the Appellant submitted that during the assessment proceedings it had submitted the sample copy of the invoices raised by the agents as well as purchase orders vide its submission dated 16 March 2015. A remand report was also called from the learned AO under which the learned AO has contended that in absence of the copy of the agreements, the identity of the non-resident agents have not been established and hence the genuineness of the expenditure could also not be established. The same are not acceptable as the Appellant had already submitted the documents like copy of the invoices of the agents and the purchase orders. Further I agree with the submissions of the Appellant that no tax is required to be withheld on payment of commission to non-resident agents as the same is not taxable in India. The rulings of Hon'ble Supreme court in the case of RD Aggarwal & Toshoku, Delhi High Court in the case of Eon Technology, Madras High Court in the case of Fluidtherm Technology have categorically held that commission paid to non-resident agents for securing orders outside India is not taxable in India and hence no tax is required to be withheld on the same. With regard to the ruling of AAR relied on by the learned AO, I agree with the contentions of the Appellant that the Hon'ble AAR has overlooked clause (a) of Explanation 1 to Section 9(1)(i) as the nonresident agents did not carried on any activity in India and no portion of commission was attributable to the Indian operations. The position stands settled even after the withdrawal of CBDT circular 23 and 786 as several rulings post withdrawal of the said circulars have held that the foreign commission is not chargeable to tax in India. Further Ahmedabad ITAT in the case of Ajit Impex has also held that no tax is required to be withheld on payment of foreign commission. With regard to the applicability of provisions of section 195(2), Hon'ble Supreme Court in the case of GE India Technology Centre Private Ltd. (327 ITR 456) has categorically held that the provisions of section 195 are not applicable if the payments are not taxable in India. As in the present case, the payment of foreign commission is not taxable in India, the provisions of Section 195 are not applicable. Hence this ground of the Appellant is allowed.

  5. The Assessing Officer is aggrieved of the relief so granted by the CIT(A) and is in appeal before us.

  6. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position.

  7. We find that once the agreements and related invoices have been furnished by the assessee at the assessment as also at the appellate stage, and no specific defects have been pointed out in the same, it cannot be open to the revenue to contend that genuineness of commission payments is not established. The commission payments are made with regulatory approvals and through banking channels, and all the requisite documentation is furnished for perusal. In these circumstances, we are of the considered view that the CIT(A) was indeed justified in his well reasoned conclusions on this aspect of the matter. We approve the same. As regards the question as to whether the assessee had any obligations to deduct tax at source from these payments of commission to non-resident agents, as learned representatives fairly agree, the issue is now covered, in favour of the assessee, by a coordinate bench decision in the case of DCIT Vs. Welspun Corporation Ltd. [(2017) 77 taxman. 165 (And)], speaking through one of us, has observed as follows:

  8. The scheme of taxability in India, so far as the non-residents, are concerned, is like this. Section 5 (2), which deals with the taxability of income in the hands of a non-resident, provides that "the total income of any previous year of a person who is a non-resident includes all income 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 India during such year". There is no dispute that since no part of the operations of the recipient non-residents is carried out in India, no income accrues to these non-residents in India. The case of the revenue hinges on income which is "deemed to accrue or arise in India". Coming to the deeming provisions, which are set out in Section 9, we find that the following statutory provisions are relevant in this context:

    Section 9-Incomes deemed to accrue or arise in India

    (1) The following incomes will be deemed to accrue or arise in India:

    (i) all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from...

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