IN INCOME TAX APPELLATE TRIBUNAL BENCH, MUMBAI BEFORE SHRI R.C.SHARMA, AM AND SHRI AMARJIT SINGH, JM I.T.A. No.1264/Mum/2011, I.T.A.No.736/Mum/2012 & 2176/Mum/2013 ( Assessment Year: 2007-08, 2008-09 & 2009-10) M/s. Agra Engineering Co. Dy. Commissioner of C/5, Laxmi Towers, Income Tax 12(3) Vs. 6 t h Floor, BKC, Bandra(East) Aayakar Bhavan, 1 s t Floor, Mumbai - 400051 R.No.137, M.K.Road, Mumbai - 400020 PAN/GIR No. : AAAFA2297H ( Appellant) .. ( Respondent) Assessee by: Shri Narayan Atal Department by: Shri B.D.Naik Date of Hearing: 26.05.2016 Date of Pronouncement: 23.09.2016 O R D E R PER AMARJIT SINGH, JM: above mentioned appeals have been filed by assessee against different orders passed by Commissioner of Income Tax (Appeals) 23, Mumbai [hereinafter referred to as CIT(A) ] relevant to A.Y.2007-08, 2008-09 and 2009-10. Since in these I.T.A. No.1264/Mum/2011,736/Mum/2012& 2176/Mum/2013 A.Y. 2007-08, 2008-09 & 2009-10 appeals parties are same and matter of controversy is also of same which can conveniently be adjudicated together for sake of convenience. ITA NO.1264/MUM/2011(2007-08):- 2. assessee has raised following grounds:- 1. Learned Commissioner of Income Tax (Appeals) -23, Mumbai [hereafter referred to as CIT(A)] erred in confirming disallowance made by Assessing Officer (AO) of claim for deduction of overseas commission of Rs.22,20,549/- paid to non-resident foreign sales agents u/s.40(a)(i) of Income Tax act, 1961, on basis of wrong appreciation of facts and law. Your appellant submits that on facts and circumstances of case and in law and in any view of matter, tax is not deductible at source on payment of commission made to foreign (non-resident)selling agents for services rendered outside India and AO may be directed to delete disallowance of Rs.22,20,549/- made u/s.40(a)(i) of Act. 3. brief facts of case are that assessee filed return of income declaring total income to tune of Rs.1,21,80,421/- on 30.10.2007. return was processed u/s.143(1) of Income Tax Act, 1961 ( in short Act ) at returned income. case was selected for scrutiny. Notice u/s.143(2) of act was issued on 05.08.2008 and served upon assessee on 13.08.2008. Thereafter, notice u/s.142(1) of Act was also issued and served upon assessee. assessee is firm engaged in business of exports. 2 I.T.A. No.1264/Mum/2011,736/Mum/2012& 2176/Mum/2013 A.Y. 2007-08, 2008-09 & 2009-10 Under year of assessment, assessee has paid overseas commission to tune of Rs.22,20,549/- and did not deduct TDS on same. Therefore, Assessing Officer disallowed same commission u/s.40(a)(ia) of Act and added to income of assessee. But assessee was not satisfied with said addition, therefore, filed appeal before CIT(A) who confirmed said addition. Therefore, assessee has filed present appeal before us. ISSUE NO.1:- 4. Under this issue assessee has raised sole point with regard to wrong confirmation of addition of overseas commission to tune of Rs.22,20,549/- in view of section contains in section 40(a)(i) of Act. We have heard arguments advanced by learned representative of parties and perused record. learned representative of assessee has argued that assessee has made payment to tune of Rs.22,20,549/- and did not deduct TDS on same because TDS was not required to deductable as said income paid to various persons is not liable to be assessed in India. Therefore, in said circumstances CIT(A) has wrongly confirmed addition which is liable to be deleted in view of law settled in Gujarat Reclaim & Rubber Product Ltd. 60 SOT 22 (ITAT, Mumbai), CIT Vs. Gujarat Reclaim & Rubber Product Ltd. IT Appeal No.2116 of 2013 with IT Appeal No.169 of 2014 (Bombay High 3 I.T.A. No.1264/Mum/2011,736/Mum/2012& 2176/Mum/2013 A.Y. 2007-08, 2008-09 & 2009-10 Court) and Armayesh Global Vs. ACIT, 12(3), Mumbai 51 SOT 564 (ITAT-Mumbai) and CIT Vs. EON Technologies Pvt. Ltd. 343 ITR 366 (Delhi High Court). It is also argued that learned CIT(A) has wrongly arrived at this conclusion that Commission paid to various persons is in managerial in nature, therefore TDS is required to be deducted in accordance with law but said finding is not justifiable as each and every transaction have brought into notice of Assessing Officer, therefore in said circumstances addition is not liable to be sustainable in eyes of law. On other hand learned representative of department has strongly relied upon order passed by CIT(A) in question. 5. Before going further it is necessary to advert nature of services provided by non-resident on record which has been explained by assessee in his letter dated 21.12.2009. Services rendered by commission agent: Business of company company is in 100% export business and recognized export house, majority of its exports are to Africa, Middle East, South East etc. It exports products like four wheeler engines, fuel pumps, and its spare parts for automobiles, trucks and tractors under brand name ARROW 4 I.T.A. No.1264/Mum/2011,736/Mum/2012& 2176/Mum/2013 A.Y. 2007-08, 2008-09 & 2009-10 It does not have any overseas office, neither any overseas staff. In export market there is always cut throat competition from local as well as international traders and OEM suppliers. So these Commission Agents are imperative to work as representatives of company and held in marketing brand and products. They render following services: a) company has developed its own brand ARROW . It market various products as explained above, under this brand. agent helps company to popularize brand and products. b) He gives us overall demand position in that country and appraise us of respective government policies, restrictions and requirements. c) Apart from that he gives valuable information about competition, their products their strength and weaknesses. d) He coordinates with existing customers for their periodical requirements, availability of ships, shipment schedules. e) He coordinates with customers and follows up for payment if and when required. 5 I.T.A. No.1264/Mum/2011,736/Mum/2012& 2176/Mum/2013 A.Y. 2007-08, 2008-09 & 2009-10 f) He gives information about new developments in markets, competition and their products. g) He gives us information about trade fairs, exhibition etc. h) He also helps in obtaining VISA getting VISA for some of middle east and / or African countries is very time consuming. By arranging for invite letters from existing / prospective consumers and also through contacts in these countries govt. departments they help in expediting VISA process. These agents do not visit India and render services from abroad only. Their commission payment is done through bank, only after getting payments from customers. They also help us in resolving disputes, if any with buyers. In this period of recession and intense competition, most of big corporate have their own offices and staff in addition to agents. We are small company with limited resources. We cannot afford to have overseas offices and high profile staff to take care of such offices. Our overseas commission payment is just around one percent of total turnover, which is fully justified. 6 I.T.A. No.1264/Mum/2011,736/Mum/2012& 2176/Mum/2013 A.Y. 2007-08, 2008-09 & 2009-10 6. Thereafter, Assessing Officer issued notice for not deducting TDS. assessee has also made submission which has been mentioned below: We have already submitted detailed note on services rendered by foreign (non-resident) commission agents vide our letter dt.21.12.2009. You will observe that entire services are rendered by agents outside India and commission is paid to them by way of inheritance of foreign currency from India. Our clients have not deducted any TDS on commission amount since commission paid to foreign agents do not attract TDS u/s. 195 of Act in view of following:- a. sale is effected by our client on principal to principal basis. b. services are rendered by agents outside India and they do not have any PE or any branch or any business connection in India and therefore there is no income which is deemed to have accrued or arisen in India as per provision of section 9 of Act. c. Circular No.23 dt. 23.07.1969 dealing with meaning of business connection has dealt with tax liability 7 I.T.A. No.1264/Mum/2011,736/Mum/2012& 2176/Mum/2013 A.Y. 2007-08, 2008-09 & 2009-10 of foreign agents of Indian exporters in para 3(4) of circular issued by CBDT, as follows: foreign agent of Indian exporter operates in his own county 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 agent is not liable to income tax in India on commission. This view has been reiterated by Board in Circular No.786 dt. 07.02.2009. d. Vide circular no.7 of 2009 Board has withdrawn w.e.f. 22.10.2009 its circular no.23 of 1969, circular no.163 of 1975 and circular no.786 of 2000 these circulars only reiterated principles laid down by Supreme Court in R.D.Agarwal & Co. (56 ITR 20) and Toshoku Ltd. (125 ITR 525) for understanding concept of business connection and attribution of profits to business connection. However, decision of Supreme Court in these cases cannot be nullified merely by withdrawal of aforesaid circulars. e. Moreover, circulars have been withdrawn w.e.f. 22.10.2009 and therefore it at all view has to be taken that TDS is liable to be deducted from payment 8 I.T.A. No.1264/Mum/2011,736/Mum/2012& 2176/Mum/2013 A.Y. 2007-08, 2008-09 & 2009-10 of commission to foreign agents irrespective of conclusion whether any income has accrued or arisen in India, it can be applicable only to any payments made or effect after 22.10.2009. Further circulars of Board which are beneficiary in nature are binding on tax authorities and cannot be interpreted to have taken effect retrospectively. In view of above, we on our clients behalf, submit that provisions of section 40(a)(i) of Act are not attracted and requested you to please allow claim for deduction of commission to foreign agents. 7. Thereafter, Assessing Officer arrived at this conclusion that services offered by said persons are covered under managerial services and included as fees for technical services. assessee did not obtain any services u/s.194(2) of Act, therefore, payment made to various persons to tune of Rs.22,20,549/- was disallowed u/s.40(a)(i) of Act. No doubt CIT(A) has confirmed same. Now it is required to be seen whether CIT(A) has rightly confirmed order or not. assessee has relied upon above mentioned law and also circular no.786 dated 07.02.2009 issued by CBDT wherein it is specifically mentioned that in such kind of payments provision u/s.40(a)(i) of Act is not liable to be attracted. important point to arrive at this point is that whether 9 I.T.A. No.1264/Mum/2011,736/Mum/2012& 2176/Mum/2013 A.Y. 2007-08, 2008-09 & 2009-10 income is chargeable to tax in India or not. There is nothing on record to which it can be assumed that said commission is liable to be taxed in India. On this issue law has already been settled in case of Gujarat Reclaim & Rubber Products Ltd. Vs. Additional Commissioner of Income Tax 10(2), ITAT, Mumbai bench in which it is specifically held that where assessee has paid commission to non-resident agent outside India for services provided in foreign countries and in absence of PE of non-resident agent in India said payment would not be chargeable to tax in India, therefore, no disallowance under section 40(a)(i) of Act can be made. revenue has filed appeal against said order which has been dismissed by Jurisdictional Bombay High Court in ITA No.2116 of 2013 with ITA No.169 of 2014 in case of CIT Vs. Gujarat Reclaim & Rubber Products Ltd. dated 08.12.20015. In case of section 40(a)(ia) of Act co-ordinate bench of Hydrabad in case of DCIT Vs. Divi s Laboratories Ltd. 131 ITD 271 has also held that payment of commission made to overseas agent without deduction of TDS does not attract disallowance u/s.40(a)(ia) of Act and also place reliance upon CBDT Circular No.7 dated 22.10.2009. 8. In instant case services have been rendered outside India which is not liable to be taxable in India. Moreover, it is pertinent to subscribe contents of circular no.786 dated 07.02.2009 issued by CBDT which may clarify more in connection with services 10 I.T.A. No.1264/Mum/2011,736/Mum/2012& 2176/Mum/2013 A.Y. 2007-08, 2008-09 & 2009-10 rendered outside India which is not liable to taxed in India, is hereby reproduced below:- Subject: Deduction of tax u/s.195 and taxability of export commission payable to non-resident agents rendering services abroad clarification regarding: In Audit Report for 1997-98 (D P No.79 (I.T). Comptroller and Auditor General (C &AG) raised objection that Assessing Officer in computing Profits and Gains of Business or Profession, in case in Mumbai charge, had wrongly allowed deduction in respect of payment to non- resident where tax had not been deducted at source. nature of payment in this case was export commission and charges payable for services rendered outside India. In view of C&AG expenditure should have been disallowed in accordance with provisions of section 40(a)(i) of Income Tax Act, 1961. It has come to notice of Board that similar view, on same set of facts has been taken by some Assessing Officers in other charges. deduction of tax at source under section 195 would arise if payment of commission to non-resident agent is chargeable to tax in India. In this regard attention to CBDT Circular No.23 dated 23.07.1969 is drawn, where taxability 11 I.T.A. No.1264/Mum/2011,736/Mum/2012& 2176/Mum/2013 A.Y. 2007-08, 2008-09 & 2009-10 of Foreign Agents of Indian Exporters was considered alongwith certain other specific situations. It had been clarified then what where non-resident agent operates outside country, no part of his income arises in India. Further, since 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. relevant sections, namely section 5(2) and section 9 of Income Tax Act, 1961 not having undergone any charge in this regard, clarification in Circular No.23 shall prevails. No tax is therefore deductible under section 195 and consequently expenditure on export commission and other related charges payable to non-resident for services rendered outside India becomes allowable expenditure. On being apprised of this position, Comptroller & Auditor General have agreed to drop objection referred to above. This may be brought to notice of all assessing officers working in your region. 9. It is not in dispute that assessee paid commission for services rendered outside India which is not taxable in India. Therefore, assessee is not under obligation to deduct TDS u/s.40(a)(ia) of Act. Accordingly, by relaying upon law mentioned above we set aside order of CIT(A) and direct 12 I.T.A. No.1264/Mum/2011,736/Mum/2012& 2176/Mum/2013 A.Y. 2007-08, 2008-09 & 2009-10 Assessing Officer to delete said addition, therefore this issue is decided in favour of assessee against revenue. In result appeal filed by assessee is hereby ordered to be allowed. ITA NO.736/MUM/2012(A.Y.2008-09):- 10. assessee has raised following grounds:- 1. Learned Commissioner of Income Tax (Appeals) -23, Mumbai [hereafter referred to as CIT(A)] erred in confirming disallowance made by Assessing Officer (AO) of claim for deduction of overseas commission of Rs.22,20,549/- paid to non-resident foreign sales agents u/s.40(a)(i) of Income Tax act, 1961, on basis of wrong appreciation of facts and law. Your appellant submits that on facts and circumstances of case and in law and in any view of matter, tax is not deductible at source on payment of commission made to foreign (non-resident)selling agents for services rendered outside India and AO may be directed to delete disallowance of Rs.18,59,299/- made u/s.40(a)(i) of Act. 2. CIT(A) erred in confirming disallowance made by AO in respect of payment of freight charges for shipment of goods from Ports in India to destinations outside India to non-resident shipping companies and / or their agents in India to extent of Rs.7,35,614/- u/s. 40(a)(ia) of Act on ground that tax was not deducted at source in respect of these payments. Your appellant submits that no tax was deductible at source on basis of declaration given by these companies relying on circular no.723 dt. 19.09.1995 issued by CBDT 13 I.T.A. No.1264/Mum/2011,736/Mum/2012& 2176/Mum/2013 A.Y. 2007-08, 2008-09 & 2009-10 and applicable to these companies who are assessed to tax u/s.172 of Income Tax Act. Your appellant therefore submits that AO may be directed to allowed deduction of Rs.7,35,614/- as claimed. 11. facts of present case are quite similar to above said ITA No.1264/Mum/2011 however figures are different. matter of controversy involved is also same which has been involved in above mentioned appeal. In instant case assessee has challenged confirmation of disallowance made by Assessing Officer paid to agents as overseas commission to tune of Rs.18,59,299/- in view of provision u/s.40(a)(ia) of Act. Since this matter of controversy has already been adjudicated in ITA No. 1264/Mum/2011, therefore we decide this appeal on same terms and conditions as held in above said appeal and allowed appeal of assessee. ITA NO.2176/MUM/2013(A.Y.2009-10):- 12. assessee has raised following grounds:- 1. Learned Commissioner of Income Tax (Appeals) -23, Mumbai [hereafter referred to as CIT(A)] erred in confirming disallowance made by Assessing Officer (AO) of claim for deduction of overseas commission of Rs.28,83,289/- paid to non-resident foreign sales agents u/s.40(a)(i) of Income Tax act, 1961, on basis of wrong appreciation of facts and law. 14 I.T.A. No.1264/Mum/2011,736/Mum/2012& 2176/Mum/2013 A.Y. 2007-08, 2008-09 & 2009-10 Your appellant submits that on facts and circumstances of case and in law and in any view of matter, tax is not deductible at source on payment of commission made to foreign (non-resident)selling agents for services rendered outside India and AO may be directed to delete disallowance of Rs.28,83,289/- made u/s.40(a)(i) of Act. 13. facts of present case are quite similar to above said ITA No.1264/Mum/2011 however figures are different. matter of controversy involved is same which has been involved in above mentioned appeals. In instant case assessee has challenged confirmation of disallowance made by Assessing Officer with regard to commission paid to overseas agents to tune of Rs.28,83,289/- in view of provision u/s.40(a)(ia) of Act. Since this matter of controversy has already been adjudicated in ITA No. 1264/Mum/2011, therefore we decide this appeal on same terms and conditions as held in above said appeal and allowed appeal of assessee. 14. In result, all appeals filed by assessee are hereby Allowed. Order pronounced in open court on 23rd September, 2016. Sd/- Sd/- (R.C.SHARMA) (AMARJIT SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai; Dated : 23rd September, 2016 MP 15 I.T.A. No.1264/Mum/2011,736/Mum/2012& 2176/Mum/2013 A.Y. 2007-08, 2008-09 & 2009-10 Copy of Order forwarded to : 1. Appellant 2. Respondent. 3. CIT(A)- 4. CIT 5. DR, ITAT, Mumbai 6. Guard file. BY ORDER, //True Copy// /(Dy./Asstt. Registrar) ITAT, Mumbai 16 M/s. Agra Engineering Co. v. Dy. Commissioner of Income Tax, 12(3), Mumbai