DCIT, New Delhi v. M/s Eon Technology (P) Ltd.,, New Delhi

ITA 5692/DEL/2010 | 2007-2008
Pronouncement Date: 28-02-2011 | Result: Dismissed

Appeal Details

RSA Number 569220114 RSA 2010
Assessee PAN OFTHE1922A
Bench Delhi
Appeal Number ITA 5692/DEL/2010
Duration Of Justice 2 month(s) 13 day(s)
Appellant DCIT, New Delhi
Respondent M/s Eon Technology (P) Ltd.,, New Delhi
Appeal Type Income Tax Appeal
Pronouncement Date 28-02-2011
Appeal Filed By Department
Order Result Dismissed
Bench Allotted B
Tribunal Order Date 28-02-2011
Assessment Year 2007-2008
Appeal Filed On 15-12-2010
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH B DELHI) BEFORE SHRI A.D. JAIN AND SHRI K.D. RANJAN ITA NO. 5692(DEL)2010 ASSESSMENT YEAR: 2007-08 DY.COMMISSIONER OF INCOME TAX M/S. EON TE CHNOLOGY (P)LTD. CIRCLE 11(1) NEW DELHI. V. 63 SURYA NIKETAN N. DELHI. (APPELLANT) (RESPONDENT) APPELLANT BY: SHRI B. KISHORE SR. DR RESPONDENT BY: SHRI GAU TAM JAIN CA ORDER PER A.D. JAIN J.M . THIS IS DEPARTMENTS APPEAL FOR ASSESSMENT YEA R 2007-08 CONTENDING THAT THE LEARNED CIT(A) HAS ERRED IN DELETING THE DISALL OWANCE OF ` 33 36 068/- MADE BY THE AO U/S 40(A)(I) OF THE INCOME TAX ACT. 2. THE ASSESSEE COMPANY IS IN THE BUSINESS OF DEVEL OPMENT AND EXPORT OF SOFTWARE. DURING THE YEAR IT CLAIMED DEDUCTION OF ` 33 36 068/- REPRESENTING COMMISSION PAID TO M/S. EON TECHNOLOGI ES U.K. (ETUK FOR SHORT) UNDER AN AGREEMENT DATED 20.3.2006. THE DED UCTION WAS DISALLOWED U/S 40(A)(I) OF THE ACT. THE AO OBSERVED THAT THE ASSESSEE HAD PAID THE COMMISSION TO ETUK UNDER THE AGREEMENT ON THE SAL ES AND AMOUNTS ITA NO.5692(DEL)2010 2 REALIZED AGAINST EXPORTS ON CONTRACTS WON BY ETUK F OR THE ASSESSEE. THE CONTRACT WAS FOUND TO HAVE BEEN ENTERED INTO SINCE THE ASSESSEE WAS NOT IN A POSITION TO INTERACT AND SET UP A SALES AND MARKETI NG SUPPORT MANAGEMENT OPERATIONS FOR WHICH ETUK WAS TO INVEST IN AND OP ERATE THE SALES AND MARKETING OPERATIONS FROM THE U.K. THE AO WAS HO WEVER OF THE OPINION THAT THE COMMISSION PAYMENT OUGHT TO HAVE BEEN SUBJ ECTED TO TDS. THIS HAVING NOT BEEN DONE THE AO MADE DISALLOWANCE U/S 40(A)(I) OF THE ACT. WHILE DOING SO THE AO OBSERVED THAT ETUK BEING THE SOLE SELLING AND MARKETING AGENT FOR THE ASSESSEE IT WAS RENDERING THE SERVICES OF THE SALE AGENT THEREBY ENABLING IT TO EARN THE RIGHT TO REC EIVE THE INCOME FROM THE ASSESSEE; THAT SINCE THE SITUS OR ORIGIN OF THE REC EIPT WAS IN INDIA THE INCOME WAS LIABLE TO TAX IN INDIA; THAT THE RIGHT TO RECEI VE THE INCOME IN INDIA AND THEREFORE THE PLACE OF ACCRUAL OF INCOME WAS IN I NDIA; THAT IT WAS A CORRESPONDING LIABILITY OF THE PAYER I.E. THE ASS ESSEE TO MAKE THE PAYMENT OF THE AMOUNT AT THE PLACE OF ACCRUAL OF THE INCOME I.E. INDIA; THAT THE SOURCE OF INCOME ARISEN TO ETUK WAS ITS BUSINESS C ONNECTION WITH THE ASSESSEE COMPANY IN INDIA AND SO THERE WAS NO FORC E IN THE ASSESSEES STAND THAT THE INCOME ACCRUING OR ARISING ABROAD THROUGH ANY BUSINESS CONNECTION IN INDIA CANNOT BE DEEMED TO ACCRUE OR ARISE IN IND IA SINCE NO BUSINESS OPERATION WAS CARRIED OUT IN THE TAXABLE TERRITORY OF INDIA; THAT RECEIPT AND ITA NO.5692(DEL)2010 3 RIGHT TO RECEIVE BEING TWO DIFFERENT NON INTERCHA NGEABLE CONCEPTS THERE WAS ALSO NO MERIT IN THE ASSESSEES CONTENTION THAT THE COMMISSION PAYMENT HAVING BEEN REMITTED DIRECTLY TO ETUK IN THE UK TH E SAME WAS NOT RECEIVED IN INDIA; AND THAT SINCE ETUK HAD A BUSINE SS CONNECTION IN INDIA IT HAD EARNED THE RIGHT TO RECEIVE THE INCOME IN INDIA AND SUCH INCOME WAS THUS DEEMED TO ACCRUE OR ARISE IN INDIA. 3. BY VIRTUE OF THE IMPUGNED ORDER THE LD. CIT(A) DELETED THE DISALLOWANCE MADE BY THE AO. 4. AGGRIEVED THE DEPARTMENT IS IN APPEAL. 5. CHALLENGING THE IMPUGNED ORDER THE LD. DR HAS C ONTENDED THAT THE LD. CIT(A) HAS ERRED IN DELETING THE ADDITION RIGHTLY M ADE BY THE AO U/S 40(A)(I) OF THE ACT; THAT THE LD. CIT(A) HAS GONE WRONG IN R ELYING ON THE DECISION DATED 9.9.2010 OF THE HONBLE SUPREME COURT IN THE CASE OF GE INDIA TECHNOLOGY CENTRE (P) LTD. V. CIT (COPY PLACED ON RECORD BY THE ASSESSEE AT PAGES 29 TO 33 OF ITS PAPER BOOK); THAT THE MATT ER STANDS DECIDED IN FAVOUR OF THE DEPARTMENT BY THE HONBLE SUPREME COURT IN TRANSMISSION CORPORATION OF ANDHRA PRADESH LTD. V. CIT 239 IT R 587(SC); THAT TRANSMISSION CORPORATION OF ANDHRA PRADESH LTD. ( SUPRA) DOES NOT STAND OVER-RULED BY GE INDIA TECHNOLOGY CENTRE (P)LTD. (SUPRA); THAT AS HELD IN TRANSMISSION CORPORATION OF ANDHRA PRADESH LTD. ( SUPRA) WHERE THE ITA NO.5692(DEL)2010 4 ASSESSEE DISPUTES LIABILITY TO DEDUCT TDS IT IS IN CUMBENT FOR THE ASSESSEE TO FILE AN APPLICATION IN THIS REGARD BEFORE THE AO FO R DETERMINATION OF SUM CHARGEABLE TO TAX; THAT THIS WAS NOT DONE IN THE PR ESENT CASE; THAT THEREFORE IN ACCORDANCE WITH TRANSMISSION CORPORATION OF AND HRA PRADESH LTD. (SUPRA) THE DISALLOWANCE U/S 40(A)(I) OF THE ACT AS ORDERED BY THE AO WAS ENTIRELY CALLED FOR; AND THAT AS SUCH THE ORDER PA SSED BY THE LD. CIT(A) BEING ERRONEOUS THE SAME BE CANCELLED AND THAT PASSED BY THE AO BE ORDERED TO BE REVIVED BY ALLOWING THE DEPARTMENTS APPEAL. 6. ON THE CONTRARY THE LEARNED COUNSEL FOR THE ASS ESSEE HAS STRONGLY DEFENDED THE ORDER UNDER APPEAL. IT HAS BEEN CONTE NDED AS BEFORE THE AUTHORITIES BELOW THAT THERE WAS NO BUSINESS CONN ECTION BETWEEN THE ASSESSEE AND ETUK IN INDIA AND SO ETUK DID NOT ACQ UIRE ANY RIGHT TO RECEIVE INCOME EARNED IN INDIA; THAT IT HAS NOT BEE N DISPROVED BY THE AO THAT ETUK RENDERED SERVICES TO THE ASSESSEE COMPANY OUT SIDE INDIA; THAT UNDENIABLY THE ASSESSEE COMPANY STANDS INCORPORATE D IN INDIA AND IT HAD ITS OPERATIONS IN INDIA DURING THE YEAR ; THAT THERE IS NOTHING ON RECORD THAT ETUK HAD RENDERED SERVICES IN INDIA; THAT THE CONTR ACT BETWEEN THE ASSESSEE COMPANY AND ETUK WAS ITSELF ENTERED INTO SINCE THE ASSESSEE WAS NOT IN A POSITION TO INTERACT AND SET UP SALES AND MARKETING SUPPORT MANAGEMENT OPERATIONS IN THE ASSESSEES CLIENTS LOCATIONS FO R WHICH IT WAS THAT ETUK ITA NO.5692(DEL)2010 5 WAS TO INVEST IN AND OPERATE THE SALES AND MARKETIN G OPERATIONS FROM THE UK; THAT THIS FACT STANDS NOTED IN THE ASSESSMENT ORDER ITSELF; THAT THE COMMISSION PAID DOES NOT CONSTITUTE OR GIVE RISE TO ANY INCOME CHARGEABLE IN INDIA EITHER UNDER THE INDIAN INCOME TAX ACT OR UNDER THE PROVIS IONS OF THE INDO-UK DTAA; THAT AS SUCH NO TAX WAS DEDUCTIBLE REGARDING THE COMMISSION PAID U/S 195 OF THE I.T. ACT; THAT THAT BEING SO NO DIS ALLOWANCE OUGHT TO HAVE BEEN MADE U/S 40(A)(I) OF THE ACT; THAT OTHERWISE T OO ACCORDING TO THE CBDT CIRCULAR NO. 786 DATED 7.2.2000 (241 ITR 132 STATUT E) AND CBDT CIRCULAR NO. 23 DATED 23.7.69 COMMISSION PAID TO NON-RESIDE NT INDIANS FOR THE SERVICES RENDERED OUTSIDE INDIA ARE NOT CHARGEABLE TO TAX IN INDIA; THAT UNDOUBTEDLY CBDT CIRCULARS ARE BINDING ON THE DEPA RTMENT; THAT ETUK HAVING NO OPERATIONS IN INDIA THE COMMISSION EARNE D BY ETUK CANNOT BE HELD TO BE ATTRIBUTABLE EITHER DIRECTLY OR INDIREC TLY TO ANY OPERATIONS CARRIED ON IN INDIA; THAT THE AO BROUGHT NOTHING ON RECORD TO SHOW OTHERWISE; THAT AS SUCH THE AO ERRED IN HOLDING THAT THERE WAS A B USINESS CONNECTION BETWEEN THE ASSESSEE AND ETUK IN INDIA WHICH ALLEG ED BUSINESS CONNECTION COULD HAVE PROVIDED ETUK WITH THE RIGHT TO RECEIVE THE INCOME IN INDIA; THAT THERE EXISTS A PRINCIPLE TO PRINCIPLE RELATION SHIP BETWEEN THE ASSESSEE AND ETUK DUE TO WHICH ETUK HAS AN INDEPENDENT STA TUS; THAT THEREFORE THERE DOES NOT EXIST ANY BUSINESS CONNECTION OF ETU K WHICH COULD HAVE ITA NO.5692(DEL)2010 6 RESULTED ANY EARNING OF INCOME OUTSIDE INDIA; THAT HENCE NO FOREIGN INCOME CAN BE DEEMED TO ACCRUE OR ARISE IN INDIA; THAT FUR THER ETUK IS NOT SHOWN TO HAVE ANY PERMANENT ESTABLISHMENT IN INDIA AND SO INCOME DERIVED FROM BUSINESS OUTSIDE INDIA IS NOT ASSESSABLE IN INDIA; THAT THE LD. CIT(A) HAS RIGHTLY RELIED ON GE INDIA TECHNOLOGY CENTRE (P)LT D. (SUPRA); THAT IN GE INDIA TECHNOLOGY CENTRE (P)LTD. (SUPRA) IT HAS B EEN HELD THAT SECTION 195(1) OF THE ACT TALKS OF INCOME CHARGEABLE UNDER THE PROVISIONS OF THE ACT AND SAYS THAT A PERSON PAYING INTEREST OR ANY OTHER SUM TO A NON-RESIDENT IS NOT LIABLE TO DEDUCT TAX IF SUCH SUM IS NOT CHARGEA BLE TO TAX UNDER THE INCOME TAX ACT; THAT THEREFORE IN ACCORDANCE WITH GE IND IA TECHNOLOGY CENTRE (P)LTD. (SUPRA) CHARGEABILITY TO TAX OF THE SUM PAID UNDER THE PROVISIONS OF THE ACT IS A STATUTORY PRE-CONDITION FOR INVOKI NG SECTION 195(1) OF THE ACT; THAT IT WAS ON THIS BASIS THAT THE LD. CIT(A) HELD THAT THE COMMISSION PAID BY THE ASSESSEE TO ETUK A NON-RESIDENT WHO H AD RENDERED SERVICES OUTSIDE INDIA WAS A SUM NOT CHARGEABLE TO TAX IN I NDIA; THAT THE LD. CIT(A) HAS ALSO RIGHTLY PLACED RELIANCE ON CIT V. TOSHOKU LIMITED 125 ITR 525(SC) WHEREIN IT HAS BEEN HELD THAT BUSINESS CO NNECTION PRESUPPOSES THAT THE NON-RESIDENT CARRIES ON BUSINESS IN INDIA; THAT IN THE PRESENT CASE SINCE NO BUSINESS WAS CARRIED OUT IN INDIA BY THE N ON-RESIDENT I.E. ETUK IT HAD NO BUSINESS CONNECTION; AND THAT IN THESE FAC TS THE ORDER OF THE LD. ITA NO.5692(DEL)2010 7 CIT(A) BEING AN ELABORATE WELL REASONED ORDER IS ENTITLED TO BE UPHELD BY DISMISSING THE DEPARTMENTS APPEAL WHICH DOES NOT CARRY ANY MERIT WHATSOEVER. 7. WE HAVE HEARD THE PARTIES AND HAVE PERUSED THE M ATERIAL ON RECORD. THE FACTS ARE NOT IN DISPUTE. THE ONLY ISSUE IS A S TO WHETHER THE LD. CIT(A) HAS CORRECTLY DELETED THE DISALLOWANCE MADE BY THE AO REGARDING THE COMMISSION PAID BY THE ASSESSEE TO ETUK WITHOUT MAK ING TDS. 8. AS PER THE CONTRACT AGREEMENT BETWEEN THE ASSESS EE AND ETUK SINCE THE ASSESSEE WAS NOT IN A POSITION TO INTERACT AND SET UP A SALES AND MARKETING SUPPORT MANAGEMENT OPERATIONS IN THE CLIENTS LOCAT IONS ETUK WAS TO INVEST AND OPERATE THE SALES AND MARKETING OPERATIO NS FROM UK. THUS ETUK RENDERED SERVICES TO THE ASSESSEE COMPANY OUTS IDE INDIA. THAT BEING SO IT CANNOT BE SAID THAT THERE WAS ANY RIGHT TO R ECEIVE INCOME EARNED IN INDIA OR THAT THERE WAS ANY BUSINESS CONNECTION BE TWEEN THE ASSESSEE AND ETUK. THE AO DID NOT BRING ANYTHING ON RECORD TO SHOW THAT ANY SERVICE WAS PERFORMED BY ETUK IN INDIA. PERTINENTLY THE C BDT CIRCULARS CONSIDERED BY THE LD. CIT(A) ARE TO THE EFFECT THAT COMMISSION PAID TO NON- RESIDENTS FOR SERVICES RENDERED OUTSIDE INDIA ARE N OT CHARGEABLE TO TAX IN INDIA. THE CIRCULARS ARE BINDING ON THE DEPARTMEN T. ITA NO.5692(DEL)2010 8 9. APROPOS TRANSMISSION CORPORATION OF ANDHRA PRA DESH LTD. (SUPRA) THEREIN IT HAS BEEN HELD THAT THE PROVISIONS OF SE CTION 195(1) OF THE ACT ARE FOR TENTATIVE DEDUCTION OF INCOME TAX ON THE SUM CH ARGEABLE; THAT THE ONLY THING REQUIRED IS TO FILE AN APPLICATION FOR DETERM INATION BY THE AO THAT SUCH SUM WOULD NOT BE CHARGEABLE TO TAX IN THE CASE OF T HE RECIPIENT OR FOR DETERMINATION OF THE APPROPRIATE PROPORTION OF SUCH SUM SO CHARGEABLE OR FOR GRANT OF A CERTIFICATE AUTHORIZING THE RECIPIEN T TO RECEIVE THE AMOUNT WITHOUT DEDUCTION OF TAX OR DEDUCTION OF INCOME TA X AT ANY LOWER RATE; THAT ON SUCH DETERMINATION TAX OF THE APPROPRIATE RATE COULD BE DEDUCTED AT SOURCE; AND THAT IF NO SUCH APPLICATION IS FILED I NCOME TAX ON SUCH SUM IS TO BE DEDUCTED AND IT IS THE STATUTORY OBLIGATION OF T HE PERSON RESPONSIBLE FOR PAYING SUCH SUM TO DEDUCT TAX THEREON BEFORE MAKIN G THE PAYMENT. 10. IT IS ON THE ABOVE OBSERVATIONS OF THE HONBLE SUPREME COURT IN TRANSMISSION CORPORATION OF ANDHRA PRADESH LTD. ( SUPRA) THAT THE DEPARTMENT SEEKS TO LAY MUCH STRESS. HOWEVER IT APPEARS THAT THE DEPARTMENT HAS MISSED THE FACT THAT THESE OBSERVATI ONS OF THE HONBLE SUPREME COURT ARE BASED ON THE OBSERVATIONS SUCCEED ING THEIR LORDSHIPS OTHER OBSERVATIONS TO THE EFFECT THAT AND WE REPRO DUCE HEREUNDER THE RELEVANT PORTION THEREOF:- ITA NO.5692(DEL)2010 9 THE SCHEME OF SUB-SECTIONS(1)(2) AND (3) OF SECTION 195 AND SECTION 197 LEAVES NO DOUBT THAT THE EXPRESSION ANY OTHER SUMS CHARGEABLE UNDER THE PROVISIONS OF THIS ACT WOULD MEAN SUM ON WHICH INCOME TAX IS LEVIABLE. IN OTHER WORDS THE SAID SUM IS CHARGEABLE TO TAX AND COULD BE ASSESSED TO TAX UNDE R THE ACT. THE CONSIDERATION WOULD BE WHETHER PAYMENT OF THE SUM T O THE NON- RESIDENT IS CHARGEABLE TO TAX UNDER THE PROVISIONS OF THE ACT OR NOT THE PURPOSE OF SUB-SECTION (1) OF SECTION 195 IS TO SEE THAT ON THE SUM WHICH IS CHARGEABLE U/S 4 OF THE AC T FOR LEVY AND COLLECTION OF INCOME TAX THE PAYER SHOULD DEDUCT I NCOME TAX THEREON AT THE RATES IN FORCE IF THE AMOUNT IS TO BE PAID TO A NON- RESIDENT.. 11. IT IS THUS SEEN THAT ACCORDING TO TRANSMISSION CORPORATION OF ANDHRA PRADESH LTD. (SUPRA) IN THE FIRST PLACE SECTION 195(1) TALKS OF SUM CHARGEABLE UNDER THE PROVISIONS OF THE ACT. THE LORDSHIPS HAVE LAID DOWN THAT AS PER SECTION 195(1) THE PAYER SHOULD DEDUC T INCOME TAX ON THE SUM WHICH IS CHARGEABLE U/S 4 OF THE ACT. TDS IS TO B E MADE ON SUCH SUM I.E. THE SUM CHARGEABLE U/S 4 OF THE ACT. THE APPLICAT ION REQUIRED TO BE FILED BEFORE THE AO IS FOR DETERMINATION AS TO WHETHER THE WHOLE OF SUCH SUM WOULD NOT BE CHARGEABLE TO TAX IN THE CASE OF THE R ECIPIENT. AS PER TRANSMISSION CORPORATION OF ANDHRA PRADESH LTD. ( SUPRA) IF NO SUCH APPLICATION IS FILED TDS IS TO BE MADE ON SUCH SU M. 12. THEREFORE THE PRE-REQUISITE IS THE CHARGEABILI TY OF THE SUM U/S 4 OF THE ACT. IF THE SUM IS AT THE OUTSET NOT CHARGEABLE TO TAX THERE IS OBVIOUSLY NO QUESTION OF MAKING TDS THEREON. IN THE WORDS OF TRANSMISSION ITA NO.5692(DEL)2010 10 CORPORATION OF ANDHRA PRADESH LTD. (SUPRA) IF TH E SUM THAT IS TO BE PAID TO THE NON-RESIDENT IS CHARGEABLE TO TAX TAX IS REQUI RED TO BE DEDUCTED. 13. SECTION 4(1) OF THE I.T. ACT LAYS DOWN THAT WHE RE ANY CENTRAL ACT ENACTS THAT INCOME TAX SHALL BE CHARGED FOR ANY ASS ESSMENT YEAR AT ANY RATE OR RATES INCOME TAX AT THAT RATE OR THOSE RATES SH ALL BE CHARGED FOR THAT YEAR IN ACCORDANCE WITH AND SUBJECT TO THE PROVISIONS OF TH E I.T. ACT. 14. AS PER SECTION 40(A)(I) OF THE ACT ANY SUM CHA RGEABLE UNDER THE I.T. ACT WHICH IS PAYABLE OUTSIDE INDIA ON WHICH TAX I S DEDUCTIBLE AT SOURCE AND SUCH TAX HAS NOT BEEN DEDUCTED IS NOT TO BE DEDUCT ED IN COMPUTING THE INCOME CHARGEABLE AS PROFITS AND GAINS OF BUSINESS OR PROFESSION. 15. AS PER SECTION 5 OF THE ACT THE TOTAL INCOME O F ANY PREVIOUS YEAR OF A PERSON WHO IS A RESIDENT OF INDIA INCLUDES ALL INCO ME FROM WHATSOEVER SOURCE DERIVED WHICH INTER ALIA - (A) IS RECEIVE D OR DEEMED TO BE RECEIVED IN INDIA OR (B) ACCRUES OR ARISES OR IS DEEMED TO BE ACCRUED OR AROSE IN INDIA. 16. AS PER SECTION 9 (1)(I) ALL INCOME ACCRUING OR ARISING WHETHER DIRECTLY OR INDIRECTLY INTER ALIA THROUGH OR FROM ANY BUSINESS CONNECTION IN INDIA SHALL BE DEEMED TO ACCRUE OR ARISE IN INDIA. 17. THE AO HELD AS DISCUSSED HEREINABOVE THAT ET UK HAD A BUSINESS CONNECTION IN INDIA AND IT WAS THROUGH THIS BUSINES S CONNECTION THAT THE INCOME ACCRUED OR AROSE IN INDIA. HOWEVER AGAIN AS DISCUSSED NO SUCH ITA NO.5692(DEL)2010 11 BUSINESS CONNECTION EXISTS MUCH LESS IS ESTABLISHE D. THE OPERATIONS CARRIED OUT BY ETUK WERE NOT CARRIED OUT IN INDIA. ETUK DOES NOT HAVE ANY PERMANENT ESTABLISHMENT IN INDIA. ETUK WAS AC TING AS THE ASSESSEES MARKETING AGENT AND WAS PROVIDING MARKETING AND SAL ES SUPPORT TO ALL PURCHASES EXECUTED BY THE ASSESSEE COMPANY FOR ITS OVERSEAS CLIENTS. IT WAS FOR THE RENDERING OF THIS SERVICE THAT THE COMMISSI ON WAS PAID BY THE ASSESSEE TO ETUK. THE PAYMENT WAS REMITTED OUTSID E INDIA. 18. THEREFORE THE PROVISIONS OF SECTION 9(1)(I) OF THE ACT ARE NOT FULFILLED AND THERE IS NO DEEMED ACCRUAL OF INCOME IN INDIA. SO THERE IS NO INCOME WHICH COULD BE SAID TO BE INCLUDIBLE IN THE TOTAL I NCOME OF ETUK U/S 5(1) OF THE ACT AND THEREFORE THERE IS NO CASE FOR CHARGI NG INCOME TAX IN RESPECT OF THE COMMISSION PAYMENT MADE BY THE ASSESSEE TO ETUK UNDER SECTION 4(1) OF THE ACT. 19. NOW WHEN THE CHARGING SECTION ITSELF I.E. SE CTION 4(1) DOES NOT COME INTO OPERATION THERE IS NO QUESTION OF THE PR OVISIONS OF SECTION 195 IN TURN BEING SET IN MOTION AS IN SECTION 195(1) TO REITERATE THE OBSERVATIONS IN TRANSMISSION CORPORATION OF ANDHRA PRADESH LTD. ( SUPRA) THE WORDS USED ARE ANY OTHER SUM CHARGEABLE UNDER THE PROVISIONS OF THIS ACT WHICH IN THE WORDS OF THEIR LORDSHIPS WOULD MEAN SUM ON WHICH INCOME TAX IS LEVIABLE. IT IS THIS WHICH LEADS US TO THE NEXT STEP I.E. ONCE TDS IS NOT TO ITA NO.5692(DEL)2010 12 BE MADE ON THE COMMISSION PAID THERE IS NO QUESTIO N OF DISALLOWANCE U/S 40(A)(I) OF THE ACT. 20. THE CONTENTION OF THE DEPARTMENT IS THAT IN THE ABSENCE OF FILING AN APPLICATION FOR DETERMINATION BY THE AO THAT SUCH S UM WOULD NOT BE CHARGEABLE TO TAX IN THE CASE OF THE RECIPIENT THE PAYER CANNOT BE PERMITTED TO CONTEND THAT THE PAYMENT MADE TO THE NON-RESIDE NT DID NOT GIVE RISE TO INCOME CHARGEABLE IN INDIA AND THAT THEREFORE THE RE WAS NO NEED TO DEDUCT TDS. IT IS THIS THE VERY CONTENTION WHICH HAS BEEN CONSIDERED BY THE HONBLE SUPREME COURT IN GE INDIA TECHNOLOGY CENTR E (P)LTD. (SUPRA). IT WAS HELD THEREIN INTER ALIA THAT A PERSON PAYI NG THE SUM TO A NON-RESIDENT IS NOT LIABLE TO DEDUCT TAX IF SUCH SUM IS NOT LIA BLE TO TAX UNDER THE I.T. ACT. IT WAS NOTED THAT IN CIT V. COOPER ENGG. 68 ITR 457(SC) IT WAS POINTED OUT THAT IF THE PAYMENT MADE BY THE RESIDENT TO THE NON-RESIDENT WAS AN AMOUNT WHICH WAS NOT LIABLE TO TAX IN INDIA THEN N O TAX IS DEDUCTIBLE AT SOURCE EVEN THOUGH THE ASSESSEE HAD NOT MADE ANY A PPLICATION U/S 195(2) OF THE I.T. ACT [ THEN SECTION 18(3B)] OF THE I.T. ACT . IT WAS OBSERVED THAT THE APPLICATION OF SECTION 195(2) PRESUPPOSES THAT THE PERSON RESPONSIBLE FOR MAKING THE PAYMENT TO THE NON-RESIDENT IS IN NO DOU BT THAT TAX IS PAYABLE IN RESPECT OF SOME PART OF THE AMOUNT TO BE REMITTED T O A NON-RESIDENT BUT THE PERSON IS NOT SURE AS TO WHAT SHOULD BE THE PORTION SO TAXABLE OR IS NOT SURE ITA NO.5692(DEL)2010 13 AS TO THE AMOUNT OF TAX TO BE DEDUCTED; THAT IT IS IN SUCH A SITUATION THAT THE PERSON IS REQUIRED TO MAKE AN APPLICATION TO THE IT O TDS FOR DETERMINING THE AMOUNT; THAT IT IS ONLY WHEN THESE CONDITIONS A RE SATISFIED AND APPLICATION IS MADE TO THE ITO TDS THAT THE QUESTION OF MAKING AN ORDER U/S 195(2) WILL ARISE; THAT WHILE DECIDING THE SCOPE OF SECTION 195 (2) IT IS IMPORTANT TO NOTE THAT THE TAX WHICH IS REQUIRED TO BE DEDUCTED AT SO URCE IS DEDUCTIBLE ONLY OUT OF THE CHARGEABLE SUM; THAT HENCE APART FROM SECT ION 9(1) SECTIONS 4 5 9 90 AND 91 AS WELL AS THE PROVISIONS OF THE DTAA AR E ALSO RELEVANT WHILE APPLYING THE PROVISIONS CONCERNING TAX DEDUCTION AT SOURCE; THAT REFERENCE TO THE ITO TDS U/S 195(2) OR SECTION 195(3) EITHER BY THE NON-RESIDENT OR BY THE RESIDENT PAYER IS TO AVOID ANY FUTURE HASSLES F OR BOTH THE RESIDENT AS WELL AS THE NON-RESIDENT; THAT SECTIONS 195(2) AND 195(3 ) ARE SAFEGUARDS; THAT THESE PROVISIONS ARE OF PRACTICABLE IMPORTANCE; AND THAT AS SUCH WHERE A PERSON RESPONSIBLE FOR DEDUCTION IS FAIRLY CERTAIN THEN HE CAN MAKE HIS OWN DETERMINATION AS TO WHETHER THE TAX IS DEDUCTIBLE A T SOURCE AND IF SO WHAT SHOULD BE THE AMOUNT THEREOF. IT WAS OBSERVED THAT IF THE CONTENTION OF THE DEPARTMENT THAT THE MOMENT THERE IS REMITTANCE THE OBLIGATION TO DEDUCT TDS ARISES IS TO BE ACCEPTED THE WORDS CHARGEABL E UNDER THE PROVISIONS OF THE ACT IN SECTION 195(1) GET OBLITERATED. IT WAS LASTLY OBSERVED THAT THE ITA NO.5692(DEL)2010 14 PAYER IS BOUND TO DEDUCT TAX AT SOURCE ONLY IF THE AMOUNT IS ASSESSABLE IN INDIA AND IF THE TAX IS NOT SO ASSESSABLE THERE IS NO QUESTION OF MAKING TDS. 21. IT WOULD NOT BE INAPPROPRIATE TO REPRODUCE THE ABOVE OBSERVATIONS OF THEIR LORDSHIPS OF THE HONBLE SUPREME COURT IN THE IR OWN WORDS:- 7. UNDER SECTION 195(1) THE TAX HAS TO BE DEDUCTE D AT SOURCE FROM INTEREST(OTHER THAN INTEREST ON SECURITIES) OR ANY OTHER SUM(NOT BEING SALARIES) CHARGEABLE UNDER THE I.T. ACT IN THE CASE OF NON-RESIDENTS ONLY AND NOT IN THE CASE OF RESIDENTS. FAILURE TO DEDUCT THE TAX UNDER THIS SECTION MAY DISENTITLE THE PAYER TO ANY ALLOWA NCE APART FROM PROSECUTION UNDER SECTION 276B. THUS SECTION 195 IMPOSES A STATUTORY OBLIGATION ON ANY PERSON RESPONSIBLE FOR PAYING TO A NON- RESIDENT ANY INTEREST (NOT BEING INTEREST ON SECURI TIES) OR ANY OTHER SUM(NOT BEING DIVIDEND) CHARGEABLE UNDER THE PROVIS IONS OF THE I.T. ACT TO DEDUCT INCOME TAX AT THE RATES IN FORCE UNL ESS HE IS LIABLE TO PAY INCOME TAX THEREON AS AN AGENT. PAYMENT TO NO N-RESIDENTS BY WAY OF ROYALTY AND PAYMENT FOR TECHNICAL SERVICES RENDERED IN INDIA ARE COMMON EXAMPLES OF SUMS CHARGEABLE UNDER THE PR OVISIONS OF THE I.T. ACT TO WHICH THE AFORESTATED REQUIREMENT OF TA X DEDUCTION AT SOURCE APPLIES. THE TAX SO COLLECTED AND DEDUCTED IS REQUIRED TO BE PAID TO THE CREDIT OF CENTRAL GOVERNMENT IN TERMS O F SECTION 200 OF THE I.T. ACT READ WITH RULE 30 OF THE I.T. RULES 1 962. FAILURE TO DEDUCT TAX OR FAILURE TO PAY TAX WOULD ALSO RENDER A PERSON LIABLE TO PENALTY UNDER SECTION 201 READ WITH SECTION 221 OF THE I.T. ACT. IN ADDITION HE WOULD ALSO BE LIABLE UNDER SECTION 201 (1A) TO PAY SIMPLE INTEREST AT 12 PER CENT PER ANNUM ON THE AMOUNT OF SUCH TAX FROM THE DATE ON WHICH SUCH TAX WAS DEDUCTIBLE TO THE DATE O N WHICH SUCH TAX IS ACTUALLY PAID. THE MOST IMPORTANT EXPRESSION IN S ECTION 195(1) CONSISTS OF THE WORDS CHARGEABLE UNDER THE PROVISI ONS OF THE ACT. A PERSON PAYING INTEREST OR ANY OTHER SUM TO A NON-RE SIDENT IS NOT LIABLE TO DEDUCT TAX IF SUCH SUM IS NOT CHARGEABLE TO TAX UNDER THE I.T. ACT. FOR INSTANCE WHERE THERE IS NO OBLIGATION ON THE P ART OF THE PAYER AND NO RIGHT TO RECEIVE THE SUM BY THE RECIPIENT AND TH AT THE PAYMENT DOES NOT ARISE OUT OF ANY CONTRACT OR OBLIGATION BETWEEN THE PAYER AND THE RECIPIENT BUT IS MADE VOLUNTARILY SUCH PAYMENTS CA NNOT BE REGARDED AS INCOME UNDER THE I.T. ACT. IT MAY BE NOTED THAT SECTION 195 ITA NO.5692(DEL)2010 15 CONTEMPLATES NOT MERELY AMOUNTS THE WHOLE OF WHICH ARE PURE INCOME PAYMENTS IT ALSO COVERS COMPOSITE PAYMENTS WHICH HAS AN ELEMENT OF INCOME EMBEDDED OR INCORPORATED IN THEM. THUS WHERE AN AMOUNT IS PAYABLE TO A NON-RESIDENT THE PAYER IS U NDER AN OBLIGATION TO DEDUCT TAS IN RESPECT OF SUCH COMPOSITE PAYMENTS . THE OBLIGATION TO DEDUCT TAS IS HOWEVER LIMITED TO THE APPROPRIA TE PROPORTION OF INCOME CHARGEABLE UNDER THE ACT FORMING PART OF THE GROSS SUM OF MONEY PAYABLE TO THE NON-RESIDENT. THIS OBLIGATIO N BEING LIMITED TO THE APPROPRIATE PROPORTION OF INCOME FLOWS FROM THE WORDS USED IN SECTION 195(1) NAMELY CHARGEABLE UNDER THE PROVI SIONS OF THE ACT. IT IS FOR THIS REASON THAT VIDE CIRCULAR NO. 728 DATED OCTOBER 30 1995 THE CBDT HAS CLARIFIED THAT THE TAX DEDUCT OR CAN TAKE INTO CONSIDERATION THE EFFECT OF DTAA IN RESPECT OF PAYM ENT OF ROYALTIES AND TECHNICAL FEES WHILE DEDUCTING TAS. IT MAY ALS O BE NOTED THAT SECTION 195(1) IS IN IDENTICAL TERMS WITH SECTION 1 8 (3B) OF THE 1922 ACT. IN CIT V. COOPER ENGINEERING (68 ITR 457) IT WAS POINTED OUT THAT IF THE PAYMENT MADE BY THE RESIDENT TO THE NON -RESIDENT WAS AN AMOUNT WHICH WAS NOT CHARGEABLE TO TAX IN INDIA TH EN NO TAX IS DEDUCTIBLE AT SOURCE EVEN THOUGH THE ASSESSEE HAD N OT MADE AN APPLICATION UNDER SEC. 18(3B) (NOW SECTION 195(2) O F THE I.T. ACT). THE APPLICATION OF SECTION 195(2) PRE-SUPPOSES THAT THE PERSON RESPONSIBLE FOR MAKING THE PAYMENT TO THE NON-RESID ENT IS IN NO DOUBT THAT TAX IS PAYABLE IN RESPECT OF SOME PART F THE A MOUNT TO BE REMITTED TO A NON-RESIDENT BUT IS NOT SURE AS TO WHAT SHOULD BE THE PORTION SO TAXABLE OR IS NOT SURE AS TO THE AMOUNT OF TAX TO B E DEDUCTED. IN SUCH A SITUATION HE IS REQUIRED TO MAKE AN APPLICATION TO THE ITO(TDS) FOR DETERMINING THE AMOUNT. IT IS ONLY WHEN THESE CON DITIONS ARE SATISFIED AND AN APPLICATION IS MADE TO THE ITO(TDS ) THAT THE QUESTION OF MAKING AN ORDER UNDER SECTION 195(2) WILL ARISE. IN FACT AT ONE POINT OF TIME THERE WAS A PROVISION IN THE I.T. AC T TO OBTAIN A NOC FROM THE DEPARTMENT THAT NO TAX WAS DUE. THAT CER TIFICATE WAS REQUIRED TO BE GIVEN TO RBI FOR MAKING REMITTANCE. IT WAS HELD IN THE CASE OF CZECHOSLOVAK OCEAN SHIPPING INTERNATIONAL JOINT STOCK COMPANY V. ITO [81 ITR 162(CALCUTTA)] THAT AN APPLI CATION FOR NOC CANNOT BE SAID TO BE AN APPLICATION UNDER SECTION 1 95(2) OF THE ACT. WHILE DECIDING THE SCOPE OF SECTION 195(2) IT IS IM PORTANT TO NOTE THAT THE TAX WHICH IS REQUIRED TO BE DEDUCTED AT SOURCE IS DEDUCTIBLE ONLY OUT OF THE CHARGEABLE SUM. THIS IS THE UNDERLYING PRINCIPLE OF SECTION 195. HENCE APART FROM SECTION 9(1) SECTIONS 4 5 9 90 91 AS WELL AS THE PROVISIONS OF DTAA ARE ALSO RELEVANT WHILE APP LYING TAX ITA NO.5692(DEL)2010 16 DEDUCTION AT SOURCE PROVISIONS. REFERENCE TO ITO( TDS) UNDER SECTION 195(2) OR 195(3) EITHER BY THE NON-RESIDENT OR BY THE RESIDENT PAYER IS TO AVOID ANY FUTURE HASSLES FOR BOTH RESID ENT AS WELL AS NON- RESIDENT. IN OUR VIEW SECTIONS 195(2) AND 195(3) ARE SAFEGUARDS. THE SAID PROVISIONS ARE OF PRACTICAL IMPORTANCE. THIS REASONING OF OURS IS BASED ON THE DECISION OF THIS COURT IN TRA NSMISSION CORPORATION (SUPRA) IN WHICH THIS COURT HAS OBSER VED THAT THE PROVISION OF SECTION 195(2) IS A SAFEGUARD. FROM THIS IT FOLLOWS THAT WHERE A PERSON RESPONSIBLE FOR DEDUCTION IS FAIRLY CERTAIN THEN HE CAN MAKE HIS OWN DETERMINATION AS TO WHETHER THE TAX WA S DEDUCTIBLE AT SOURCE AND IF SO WHAT SHOULD BE THE AMOUNT THEREO F. SUBMISSIONS AND FINDINGS THEREON: 8. IF THE CONTENTION OF THE DEPARTMENT THAT THE MO MENT THERE IS REMITTANCE THE OBLIGATION TO DEDUCT TAS ARISES IS T O BE ACCEPTED THEN WE ARE OBLITERATING THE WORDS CHARGEABLE UNDER THE PROVISIONS OF THE ACT IN SECTION 195(1). THE SAID EXPRESSION IN SE CTION 195(1) SHOWS THAT THE REMITTANCE HAS GOT TO BE OF A TRADING RECE IPT THE WHOLE OR PART OF WHICH IS LIABLE TO TAX IN INDIA. THE PAYE R IS BOUND TO DEDUCT TAS ONLY IF THE TAX IS ASSESSABLE IN INDIA. IF TA X IS NOT SO ASSESSABLE THERE IS NO QUESTION OF TAS BEING DEDUCTED. (SEE: VIJAY SHIP BREAKING CORPORATION AND OTHERS V. CIT 314 ITR 309). (EMPH ASIS SUPPLIED). 22. IT IS THUS SEEN THAT IN GE INDIA TECHNOLOGY CE NTRE (P)LTD. (SUPRA) THE REASONING HAS BEEN BASED ON TRANSMISSION CORPO RATION OF ANDHRA PRADESH LTD. (SUPRA). TRANSMISSION CORPORATION O F ANDHRA PRADESH LTD. (SUPRA) HAS THUS BEEN FOLLOWED IN GE INDIA TECHN OLOGY CENTRE (P)LTD. (SUPRA) AS RIGHTLY CONTENDED BY THE LEARNED COUNSE L FOR THE ASSESSEE. 23. WE MAY ALSO NOTE THAT IN TRANSMISSION CORPORA TION OF ANDHRA PRADESH LTD. (SUPRA) THE OBSERVATION MADE AMONGS T OTHERS IS THAT :- ITA NO.5692(DEL)2010 17 THE ONLY THING WHICH IS REQUIRED TO BE DONE IS TO FILE AN APPLICATION FOR DETERMINATION BY THE AO THAT SUCH SUM WOULD NOT BE CHARGEABLE TO TAX IN THE CASE OF THE RECIPIENT (EMPHASIS SUPPLIED). 24. NOW THIS APPLICATION IS NOT AN APPLICATION FOR GETTING DECLARED AS TO WHETHER A SUM IS CHARGEABLE TO TAX OR NOT. AS THE UNDERLINED PORTION MAKES CLEAR IT IS AN APPLICATION FOR GETTING DETERMINED THE ISSUE AS TO WHETHER THE SUM WOULD NOT BE CHARGEABLE TO TAX IN THE CASE OF T HE RECIPIENT OF THE SUM. 25. FURTHER IF AS CONTENDED AN APPLICATION WAS O BLIGATORY TO BE FILED BEFORE THE ITO (TDS) IT WOULD AMOUNT TO ASKING THE ITO (TDS) TO DECIDE THE ASSESSABILITY AS INCOME OF ALL THE SUMS PAID AN D RECEIVED WHICH WOULD OBVIOUSLY NOT BE IN CONSONANCE WITH THE PROVISIONS OF SECTION 195 OF THE ACT AS EXPLAINED IN GE INDIA TECHNOLOGY CENTRE (P )LTD. (SUPRA). 26. THEREFORE THE CONTENTION ON BEHALF OF THE DEPA RTMENT IS BASED ON A MISREADING OF TRANSMISSION CORPORATION OF ANDHRA PRADESH LTD. (SUPRA) AND IN IGNORANCE OF GE INDIA TECHNOLOGY CENTRE (P )LTD. (SUPRA). AS OBSERVED GE INDIA TECHNOLOGY CENTRE (P)LTD. (SUP RA) IN EFFECT FOLLOWS TRANSMISSION CORPORATION OF ANDHRA PRADESH LTD. ( SUPRA). 27. THE LEARNED CIT(A) HAS CORRECTLY REFERRED TO CB DT CIRCULAR NO. 23 DATED 23.7.1969. THEREIN IT HAS BEEN OBSERVED TH AT WHERE A FOREIGN AGENT OF AN INDIAN EXPORTER OPERATES IN HIS OWN COUNTRY A ND HIS COMMISSION IS DIRECTLY REMITTED TO HIM SUCH COMMISSION IS NOT RE CEIVED BY HIM OR ON HIS ITA NO.5692(DEL)2010 18 BEHALF IN INDIA AND THAT SUCH AGENT IS NOT LIABLE T O INCOME TAX IN INDIA ON THE COMMISSION RECEIVED BY HIM. 28. IN CBDT CIRCULAR NO. 786 DATED 7.2.2000 REPORT ED IN 241 ITR 132(STATUTE) THE ABOVE CLARIFICATION GIVEN IN CBDT CIRCULAR NO. 23 DATED 23.7.1969 HAS BEEN STATED TO STILL PREVAIL SINCE S ECTIONS 5(2) AND (9) OF THE ACT HAVE NOT UNDERGONE ANY CHANGE AND IT STATES TH AT NO TAX IS AS SUCH DEDUCTIBLE U/S 195 FROM EXPORT COMMISSION AND OTHER RELATED CHARGES PAYABLE TO A NON-RESIDENT AGENT OPERATING OUTSIDE I NDIA FOR THE SERVICES RENDERED OUTSIDE INDIA. THIS CIRCULAR HAS ALSO BEEN RIGHTLY RELIED ON BY T HE LD. CIT(A). NOTHING TO THE CONTRARY HAS BEEN ARGUED ON BEHALF O F THE DEPARTMENT. IT GOES WITHOUT SAYING THAT CBDT CIRCULARS ARE BINDING ON THE TAXING AUTHORITIES. 29. THE LEARNED CIT(A) HAS ALSO CORRECTLY PLACED RE LIANCE ON CIT V. TOSHOKU LIMITED(SUPRA). THEREIN IT WAS OBSERVED THAT THE EXPRESSION BUSINESS CONNECTION PRE-SUPPOSES THAT THE BUSINES S IS CARRIED ON IN INDIA BY THE NON-RESIDENT. THE COMMISSION AMOUNTS EARNED BY THE NON-RESIDENT FOR THE SERVICES RENDERED OUTSIDE INDIA WERE HELD I NCAPABLE OF BEING DEEMED TO BE INCOME ACCRUED OR ARISEN IN INDIA. IN THE PR ESENT CASE ALSO THE ITA NO.5692(DEL)2010 19 COMMISSION AMOUNT HAS BEEN EARNED BY ETUK UNDISPUT EDLY FOR THE SERVICES RENDERED IN THE UK AND NOT IN INDIA. 30. IN VIEW OF THE ABOVE FINDING NO ERROR WHATSOEV ER IN THE ORDER OF THE LD. CIT(A) THE SAME IS HEREBY CONFIRMED. THE GRI EVANCE SOUGHT TO BE RAISED BY THE DEPARTMENT IS FOUND TO BE DE VOID OF FORCE AND IS REJECTED AS SUCH. 31. IN THE RESULT THE APPEAL FILED BY THE DEPARTME NT IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 28.02.2011. SD/- SD/- (K.D. RANJAN) (A.D. JAIN) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 28.02.2011 *RM COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR TRUE COPY BY ORDER DEPUTY REGISTRAR