When the payment os made by assessee to overseas agent for services rendered abroad, it is not income chargeable to tax in India and hence no TDS required

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344

When the payment os made by assessee to overseas agent for services rendered abroad, it is not income chargeable to tax in India and hence no TDS required

Short Overview : When the commission payment made by assessee to overseas agent for services rendered abroad was not income chargeable to tax in India, there was no obligation cast upon assessee to deduct tax at source under section 195 and consequently, the provisions of section 40(a)(ia) would not be attracted.

According to AO, the income generated to the overseas commission agents from the receipts of commission income paid by assessee-company were clearly income accruing or arising in India for which the source of income was in India. He, accordingly, held that income arising on account of commission payable to overseas agent was deemed to accrue or arise in India and, accordingly, should be taxable under the provisions of section 5(2)(b) read with section 9(1)(i). He further observed that as per the provisions of section 195, no tax had been deducted at source upon such commission payment to the foreign agents and, therefore, the same was liable to be disallowed under section 40(a)(ia).

it is held that non-resident overseas agents had offered a service to procure export sales order and the payment was made by assessee from India. Insofar as the nonresident overseas agent was concerned, the source of income was the transaction whereby services were offered by them to the assessee by procuring export sales orders abroad. The overseas agents did not have any permanent establishment or any business connection in India nor was the source of income through, by means of, in consequence of or by reason of any source of income in India. Revenue was trying to confuse two aspects, namely, the source of payment with the source of income. Insofar as the source of income, it was not the place from where the payment was made, but the place where the transaction which yielded such income had taken place. Thus, it could not be said that any income accrued or arose to the overseas agent India as contemplated in section 9. When the payment made by assessee to overseas agent for services rendered abroad was not income chargeable to tax in India, there was no obligation cast upon assessee to deduct tax at source under section 195 and consequently, the provisions of section 40(a)(ia) would not be attracted.

Decision: In assessee’s favour.

Referred: 1. GE India Technology Centre (P) Ltd. v. CIT & Anr. (2010) 327 ITR 456 (SC) : 2010 TaxPub(DT) 2241 (SC) 2. CIT, New Delhi v. Eli Lilly & Company (India) (P) Ltd. (2009) 312 ITR 225 (SC) : 2009 TaxPub(DT) 1585 (SC) 3. Vijay Ship Breaking Corpn. & Ors. v. Commnr. of Income Tax, Ahmedabad (2009) 314 ITR 309 (SC) : 2009 TaxPub(DT) 0913 (SC) 4. CIT, AP v. Toshoku Limited (and Another Appeal) (1980) 125 ITR 525 (SC) : 1980 TaxPub(DT) 1127 (SC) 5. Czechoslovak Ocean Shipping International Joint Stock Company and Another v. ITO, A-Ward, Companies District III & Ors. (1971) 81 ITR 162 (Cal) : 1971 TaxPub(DT) 0084 (Cal-HC) 6. CIT, Bombay City I v. Cooper Engineering Limited. (1968) 68 ITR 457 (Bom) : 1968 TaxPub(DT) 0254 (Bom-HC) 7. SKF Boilers & Driers (P) Ltd., In re (2012) 343 ITR 385  (AAR) : 2012 TaxPub(DT) 1671 (AAR) 8. Rajiv Malhotra, In re (2006) 284 ITR 564 (AAR) : 2006 TaxPub(DT) 1721 (AAR).           

 

IN THE GUJARAT HIGH COURT

HARSHA DEVANI & A. P. THAKER, JJ.

Pr. CIT v. Komal Amin Exports (P) Ltd.

R/Tax Appeal Nos. 1397 & 1398 of 2018

18 February, 2019

Appellant (s) by: Mauna M Bhatt (174)

Respondents by: S.N. Divetia

COMMON ORAL ORDER

Harsha Devani, J.

Both these appeals under section 260A of the Income Tax Act, 1961 (hereinafter referred to as the “Act”) arise out of a common Order, dt. 12-7-2018 passed by the Income Tax Appellate Tribunal, Ahmedabad ‘D’ Bench, Ahmedabad (hereinafter referred to as the “Tribunal”) in ITA No. 274/Ahd/2015 and 3417/Ahd/2015 respectively, and hence, the same were taken up for hearing together and are decided by this common order.

2. In Tax Appeal No. 1397 of 2018, the appellant has proposed the following two questions, stated to be substantial questions of law :–

“(A) Whether the Appellate Tribunal has erred in law and on facts in upholding the order of the Commissioner (Appeals) by admitting the additional evidences submitted by the assessee during the appellate proceedings, in violation of rule 46(A)(1) of rules?”

(B) Whether the Appellate Tribunal has erred in law and on facts in upholding the order of the Commissioner (Appeals) deleting the addition made on account of disallowance under section 40(a)(ia) of the Act for non-deduction of tax on commission payable to foreign agents of Rs. 1,73,17,755?”

3. In Tax Appeal No. 1398 of 2018, the appellant has proposed the following question, stated to be substantial question of law :–

“(A) Whether the Appellate Tribunal has erred in law and on facts in upholding the order of the Commissioner (Appeals) deleting the addition made on account of disallowance under section 40(a)(ia) of the Act for non-deduction of tax on commission payable to foreign agents of Rs. 2,41,37,454?”

4. Question (B) in Tax Appeal No. 1397 of 2018 and the question proposed in Tax Appeal No. 1398 of 2018 are more or less identical. The assessment years are 2011-12 and 2012-13 respectively. For the sake of convenience, reference is made to the facts as appearing in Tax Appeal No. 1397 of 2018.

5. The respondent assessee filed its return of income on 29-9-2011 declaring total income of Rs. 1,33,34,320. The assessment was completed under section 143(3) of the Act on 31-1-2014 determining the assessed income at Rs. 3,06,52,075 on account of overseas commission under section 40(a)(ia) of the Act.

6. Being aggrieved, the respondent assessee went in appeal before the Commissioner (Appeals). During the course of the appellate proceedings, the assessee produced certain additional evidence. The Commissioner (Appeals) after calling for a remand report from the assessing officer accepted the additional evidence submitted by the assessee and allowed the appeal. Against the order of Commissioner (Appeals), revenue went in appeal before the Tribunal, but did not succeed.

7. Mrs. Mauna Bhatt, learned senior standing counsel for the appellant, submitted that during the course of appellate proceedings, the assessee had submitted additional evidence before the Commissioner (Appeals), who, vide letter dated 26-9-2014 called for a remand report from the assessing officer. The assessing officer in his remand report requested not to admit the additional evidence as per the provisions of rule 46A(1) of the Income Tax Rules, 1962 (hereinafter referred to as “the rules”) since the assessee did not fall within the exceptional clauses (a) to (d) of sub-rule (1) of rule 46A. However, the Commissioner (Appeals) did not consider the report of the assessing officer for not admitting the additional evidence despite the fact that the additional evidence submitted the assessee was in violation of rule 46A of the rules. It was submitted that the assessing officer had granted ample opportunity to the assessee to adduce evidence relevant to any ground of appeal. The assessee was not prevented by any sufficient cause from producing the evidence which he was called upon to produce before the assessing officer and, therefore, in the light of the provisions of rule 46A of the rules, the additional evidence was not admissible. It was submitted that the discretion exercised by the Commissioner (Appeals) while allowing additional evidence to be adduced has not been validly exercised and that the Tribunal was, therefore, not justified in upholding the same.

8. On the other hand Mr. S. N. Divetia, learned advocate for the respondent-assessee, invited the attention of the court to the order of the Commissioner (Appeals), to submit that it was during the course of appellate proceedings that the respondent was called upon to prove the genuineness of the commission also and, therefore, it was at the instance of the Commissioner (Appeals) that the additional evidence was adduced. Reference was made to rule 46A of the rules, to point out that under sub-rule (4) thereof, the Deputy Commissioner (Appeals) or as the case may be, the Commissioner (Appeals), is duly empowered to direct production of any documents or examination of any witness to enable him to dispose of the appeal or for any substantial cause. It was submitted that in the present case, since the additional evidence had been produced at the instance of the Commissioner (Appeals), the case falls under this sub-rule, and hence, the requirements of sub-rule (4) of rule 46A of the rules are not required to be satisfied.

9. Since violation of rule 46A of the rules has been alleged, it may be germane to refer to the said rule, which reads as under :–

“Production of additional evidence before the Deputy Commissioner (Appeals) and Commissioner (Appeals).

46A. (1) The appellant shall not be entitled to produce before the Deputy Commissioner (Appeals) or, as the case may be, the Commissioner (Appeals), any evidence, whether oral or documentary, other than the evidence produced by him during the course of proceedings before the assessing officer, except in the following circumstances, namely :–

(a) where the assessing officer has refused to admit evidence which ought to have been admitted ; or

(b) where the appellant was prevented by sufficient cause from producing the evidence which he was called upon to produce by the assessing officer ; or

(c) where the appellant was prevented by sufficient cause from producing before the assessing officer any evidence which is relevant to any ground of appeal ;

(d) where the assessing officer has made the order appealed against without giving sufficient opportunity to the appellant to adduce evidence relevant to any ground of appeal.

(2) No evidence shall be admitted under sub-rule (1) unless the Deputy Commissioner (Appeals) or, as the case may be, the Commissioner (Appeals) records in writing the reasons for its admission.

(3) The Deputy Commissioner (Appeals) or, as the case may be, the Commissioner (Appeals) shall not take into account any evidence produced under sub-rule (1) unless the assessing officer has been allowed a reasonable opportunity

(a) to examine the evidence or document or to cross-examine the witness produced by the appellant, or

(b) to produce any evidence or document or any witness in rebuttal of the additional evidence produced by the appellant.

(4) Nothing contained in this rule shall affect the power of the Deputy Commissioner (Appeals) or, as the case may be, the Commissioner (Appeals) to direct the production of any document, or the examination of any witness, to enable him to dispose of the appeal, or for any other substantial cause including the enhancement of the assessment or penalty whether on his own motion or on the request of the assessing officer under clause (a) of sub-section (1) of section 251 or the imposition of penalty under section 271.”

10. Thus, sub-rule (4) of rule 46A of the rules permits the Appellate Commissioner to direct production of any document, or examination of any witness to enable him to dispose of the appeal. In the facts of the present case, a perusal of the order of the Commissioner (Appeals) reveals that he has recorded therein that the assessing officer has not examined the aspect relating to genuineness of the commission expenses during the assessment proceedings and that the disallowance was on technical basis. The assessee has now given the evidence in the course of appellate proceedings as it was asked to prove the genuineness of the commission expenses also. Therefore, it is evident that it was at the instance of the Commissioner (Appeals) that the assessee had produced the additional evidence on record, which would fall within the ambit of sub-rule (4) of rule 46A of the rules, and hence, the question of violation of such rule on the ground urged on behalf of the appellant based on sub-rules (1) and (2) of rule 46A, does not arise. Moreover, the assessing officer has been given opportunity to deal with the additional evidence produced by the assessee as the remand report was called for. Under the circumstances, no substantial question of law can be said to have arisen insofar as this issue is concerned.

11. Insofar as the second question which relates to disallowance under section 40(a)(ia) of the Act is concerned, which arises in both the appeals, during the course of assessment proceedings, the assessing officer observed in the profit and loss account that the assessee had made commission expenses of Rs. 4,18,19,875 out of which commission expense of Rs. 1,73,17,755 had been made to overseas agents located in China, Bangladesh, Korea, Hongkong, Pakistan, Bahrain, etc. (in Tax Appeal No. 1398 of 2018 the amount of commission expenses was Rs. 3,80,11,338 out of which commission of Rs. 3,01,20,270 was paid). The assessing officer was of the view that under section 9(1)(i) of the Act, income accruing or arising directly or indirectly, through or from a source in India shall be deemed to accrue or arise in India. No doubt the agents must have rendered services abroad and solicited orders, but the right to receive the commission arises in India when the order is executed by the assessee in India. According to the assessing officer, the income generated to the overseas commission agents from the receipts of commission income paid by the assessee-company are clearly income accruing or arising in India for which the source of income is in India. He, accordingly, held that income arising on account of commission payable to overseas agent was deemed to accrue or arise in India and, accordingly, should be taxable under the provisions of section 5(2)(b) read with section 9(1)(i) of the Act. He further observed that as per the provisions of section 195(2), no tax had been deducted at source upon such commission payment to the foreign agents and, therefore, the same was liable to be disallowed under section 40(a)(ia) of the Act. The assessing officer thereafter by placing reliance on the ruling given by the Authority for Advance Rulings in the case of Rajiv Malhotra, In re, (2006) 284 ITR 564 (AAR) : 2006 TaxPub(DT) 1721 (AAR) and SKF Boilers and Driers (P) Ltd. (2012) 18 Taxman 325, disallowed the commission paid to foreign agents amounting to Rs. 1,73,17,755 and Rs. 3,01,20,270 respectively, by invoking the provisions of section 40(a)(ia) for non-deduction of tax at source under section 195 of the Act and added the same to the total income of the assessee. Being aggrieved, the assessee went in appeal before the Commissioner (Appeals), who allowed the appeal. Revenue went in appeal before the Tribunal but did not succeed.

12. Mrs. Mauna Bhatt, learned senior standing counsel for the appellant, submitted that the assessee had committed default by not deducting tax at source on the foreign commission payment which was clearly in violation of the provisions of section 195 of the Act. It was submitted that in the present case, the non-resident foreign agents have rendered services abroad to procure the export sales order and were entitled to receive commission for the services rendered to foreign clients of the assessee. As per section 5(2)(b) of the Act which deals with the scope of total income, the income of a non-resident includes all income from whatever sources derived, which accrues or arises or is deemed to accrue or arising directly or indirectly, through or from source of income of India during such previous year. Under section 9(1)(i) of the Act, income accruing or arising directly or indirectly, through or from any business connection in India or source of income in India shall be deemed to accrue or arise in India. It was submitted that while the agents must have rendered services abroad and have solicited the orders, but the right to receive the commission arose in India when the order was executed by the assessee in India. In this case, the income generated to the overseas commission agents from the receipt of commission income paid by the assessee-company is clearly the income accruing or arising in India for which the source of income is in India. The fact that the agents have rendered services abroad in the form of soliciting the orders and the commission was to be remitted to them abroad is wholly irrelevant for the purpose of determining the question of accrual and arising of income. It was submitted that the Tribunal has deleted the disallowance under section 40(a)(ia) of the Act by placing reliance upon the decision f the Supreme Court in the case of CIT v. Toshuku (1980) 125 ITR 525 (SC) : 1980 TaxPub(DT) 1127 (SC), however, at the relevant time Explanation 4 which has been inserted in section 9(1)(i) with effect from 1962-63 was not there in the statute book. It was submitted that the Tribunal has placed reliance upon the decision of the Supreme Court in the case of G.E. India Technology Centre (P) Ltd. v. CIT, 193 Taxman 234, which is also distinguishable from the facts of the present case. It was, accordingly, urged that the appeal does give rise to a substantial question of law as proposed or as may be deemed fit by this court.

13. On the other hand, Mr. S. N. Divetia, learned advocate for the respondent reiterated the reasoning adopted by the Commissioner (Appeals) and the Tribunal in the impugned orders and submitted that no question of law arises out of the impugned order. It was submitted that the Tribunal, in the impugned order, has recorded findings of fact after appreciating the material on record to the effect that the assessing officer failed to establish that the overseas parties were having business connection or permanent establishment in India. The assessee had furnished evidence of payment of commission through the bank on the basis of debit notes raised by the payees and stated that none of the activities of soliciting the customers or procuring orders were earned in India. The assessee had not deducted TDS according to the provisions of section 195 of the Act since the income was not raised in India because the payee had no permanent establishment or business connection in India. It was urged that the Tribunal has rightly placed reliance upon the decision of the Supreme Court in the case of CIT v. Toshuku (supra), for the proposition that commission earned by nonresident acting as a selling agent for the Indian exporter wherein such nonresident was rendering services from outside India does not accrue in India. It was pointed out that the decision in the case of CIT v. Toshuku, (supra) was rendered prior to the insertion of Explanation 4 to section 9 of the Act.

14. In the above backdrop, reference may be made to sub-section (1) of section 195 of the Act, which reads thus :–

“195. Other sums.(1) Any person responsible for paying to a nonresident, not being a company, or to a foreign company, any interest (not being interest referred to in section 194-LB or section 194-LC) or section 194-LD 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 in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income tax thereon at the rates in force”

15. Thus, to fall within the ambit of the above section, a person should be responsible to a nonresident for payment of any sum chargeable under the provisions of the Act. Therefore, to deduct tax at source, the nonresident should be chargeable to tax under the provisions of the Act.

16. At this juncture, reference may be made to the decision of the Supreme Court in the case of GE India Technology Centre (P) Ltd. v. CIT, (supra) wherein it has been held thus:–

“6. Under section 195(1), the tax has to be deducted at source from interest (other than interest on securities) or any other sum (not being salaries) chargeable under the Income Tax 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 allowance apart from prosecution under section 276-8. Thus, section 195 imposes a statutory obligation on any person responsible for paying to a non-resident, any interest (not being interest on securities) or any other sum (not being dividend) chargeable under the provisions of the Income Tax Act, to deduct income tax at the rates in force unless he is liable to pay income tax thereon as an agent. Payment to non-residents by way of royalty and payment for technical services rendered in India are common examples of sums chargeable under the provisions of the Income Tax Act to which the aforestated requirement of tax deduction at source applies.”

“10. In CIT v. Cooper Engg. Ltd. ((1968) 68 ITR 457 (Bom) : 1968 TaxPub(DT) 0254 (Bom-HC) ) 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, then no tax is deductible at source even though the assessee had not made an application under section 18 (3-B) (now Section 195(2) of the Income Tax Act). The application of section 195(2) presupposes that the person responsible for making the payment to the non-resident is in no doubt that tax is payable in respect of some part of the amount 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 be deducted. In such a situation, he is required to make an application to Income Tax Officer (TDS) for determining the amount. It is only when these conditions are satisfied and an application is made to Income Tax Officer (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 Income Tax Act to obtain a NOC from the Department that no tax was due. That certificate was required to be given to RBI for making remittance. It was held in Czechoslovak Ocean Shipping International Joint Stock Co. v. ITO ((1971) 81 ITR 162 (Cal) : 1971 TaxPub(DT) 0084 (Cal-HC) ) that an application for NOC cannot be said to be an application under section 195(2) of the Act.”

“13. If the contention of the Department that the moment there is remittance the obligation to deduct TAS arises is to be accepted then we are obliterating the words “chargeable under the provisions of the Act” in section 195(1). The said expression in section 195(1) shows that the remittance has got to be of a trading receipt, the whole or part of which is liable to tax in India. The payer is bound to deduct TAS only if the tax is assessable in India. It tax is not so assessable, there is no question of TAS being deducted. (See Vijay Ship Breaking Corpn. v. CIT (2010) 10 SCC 39.)

14. One more aspect needs to be highlighted. Section 195 falls in Chapter XVII which deals with collection and recovery. Chapter XVII-B deals with deduction at source by the payer. On analysis of various provisions of Chapter XVII one finds the use of different expressions, however, the expression “sum chargeable under the provisions of the Act” is used only in section 195. For example, section 194-C casts an obligation to deduct TAS in respect of “any sum paid to any resident”. Similarly, sections 194-EE and 194-F inter alia provide for deduction of tax in respect of “any amount” referred to in the specified provisions. In none of the provisions we find the expression “sum chargeable under the provisions of the Act”, which as stated above, is an expression used only in section 195(1). Therefore, this Court is required to give meaning and effect to the said expression. It follows, therefore, that the obligation to deduct TAS arises only when there is a sum chargeable under the Act.

15. Section 195(2) is not merely a provision to provide information to ITO(TDS). It is a provision requiring tax to be deducted at source to be paid to the Revenue by the payer who makes payment to a non-resident. Therefore, section 195 has to be read in conformity with the charging provisions i.e. Sections 4, 5 and 9. This reasoning flows from the words “sum chargeable under the provisions of the Act” in section 195(1).

16. The fact that the Revenue has not obtained any information per se cannot be a ground to construe Section 195 widely so as to require deduction of TAS even in a case where an amount paid is not chargeable to tax in India at all. We cannot read section 195, as suggested by the Department, namely, that the moment there is remittance the obligation to deduct TAS arises. If we were to accept such a contention it would mean that on mere payment income would be said to arise or accrue in India. Therefore, as stated earlier, if the contention of the Department was accepted it would mean obliteration of the expression “sum chargeable under the provisions of the Act” from section 195(1). While interpreting a section one has to give weightage to every word used in that section. While interpreting the provisions of the Income Tax Act one cannot read the charging sections of that Act dehors the machinery sections. The Act is to be read as an integrated code.

17. Section 195 appears in Chapter XVII which deals with collection and recovery. As held in CIT v. Eli Lilly & Co. (India) (P) Ltd. ((2009) 15 SCC 1) the provisions for deduction of TAS which is in Chapter XVII dealing with collection of taxes and the charging provisions of the Income Tax Act form one single integral, inseparable code and, therefore, the provisions relating to TDS applies only to those sums which are “chargeable to tax” under the Income Tax Act. It is true that the judgment in Eli Lilly ((2009) 15 SCC 1) was confined to section 192 of the Income Tax Act. However, there is some similarity between the two. If one looks at section 192 one finds that it imposes statutory obligation on the payer to deduct TAS when he pays any income “chargeable under the head ‘Salaries”‘. Similarly, section 195 imposes a statutory obligation on any person responsible for paying to a non-resident any sum “chargeable under the provisions of the Act”, which expression, as stated above, does not find place in other sections of Chapter XVII. It is in this sense that we hold that the Income Tax Act constitutes one single integral inseparable code. Hence, the provisions relating to TDS applies only to those sums which are chargeable to tax under the Income Tax Act.

18. If the contention of the Department that any person making payment to a non-resident is necessarily required to deduct TAS then the consequence would be that the Department would be entitled to appropriate the monies deposited by the payer even if the sum paid is not chargeable to tax because there is no provision in the Income Tax Act by which a payer can obtain refund. Section 237 read with section 199 implies that only the recipient of the sum i.e. the payee could seek a refund. It must therefore follow, if the Department is right, that the law requires tax to be deducted on all payments. The payer, therefore, has to deduct and pay tax, even if the so-called deduction comes out of his own pocket and he has no remedy whatsoever, even where the sum paid by him is not a sum chargeable under the Act. The interpretation of the Department, therefore, not only requires the words “chargeable under the provisions of the Act” to be omitted, it also leads to an absurd consequence. The interpretation placed by the Department would result in a situation where even when the income has no territorial nexus with India or is not chargeable in India, the Government would nonetheless collect tax. In our view, section 195(2) provides a remedy by which a person may seek a determination of the “appropriate proportion of such sum so chargeable” where a proportion of the sum so chargeable is liable to tax.”

17. Thus, the Supreme Court has held that section 195 has to be read in conformity with the charging sections, that is, sections 4, 5 and 9 of the Act. Section 5 of the Act to the extent the same is relevant for the present purpose reads thus :–

“Scope of total income.–

5. (1) xxxxx

(2) Subject to the provisions of this Act, the total income of any previous year of a person who is a nonresident 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.

Explanation 1.–Income accruing or arising outside India shall not be deemed to be received in India within the meaning of this section by reason only of the fact that it is taken into account in a balance-sheet prepared in India.

Explanation 2.–-For the removal of doubts, it is hereby declared that income which has been included in the total income of a person on the basis that it has accrued or arisen or is deemed to have accrued or arisen to him shall not again be so included on the basis that it is received or deemed to be received by him in India.”

18. Prior to its amendment by Act 23 of 2012, section 9 of the Act read as under :–

“Income deemed to accrue or arise in India.

9. (1) The following incomes shall 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 any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situate in India.

Explanation-1.–For the purposes of this clause–

(a) in the case of a business of which all the operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India;

(b) in the case of a non-resident, no income shall be deemed to accrue or arise in India to him through or from operations which are confined to the purchase of goods in India for the purpose of export;

(c) in the case of a non-resident, being a person engaged in the business of running a news agency or of publishing newspapers, magazines or journals, no income shall be deemed to accrue or arise in India to him through or from activities which are confined to the collection of news and views in India for transmission out of India;

(d) in the case of a non-resident, being

(1) an individual who is not a citizen of India; or

(2) a firm which does not have any partner who is a citizen of India or who is resident in India; or

(3) a company which does not have any shareholder who is a citizen of India or who is resident in India, no income shall be deemed to accrue or arise in India to such individual, firm or company through or from operations which are confined to the shooting of any cinematograph film in India;

Explanation 2.–For the removal of doubts, it is hereby declared that ‘business connection’ shall include any business activity carried out through a person who, acting on behalf of the non-resident,–

(a) has and habitually exercises in India, an authority to conclude contracts on behalf of the non-resident, unless his activities are limited to the purchase of goods or merchandise for the nonresident, or

(b) has no such authority, but habitually maintains in India a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the non-resident; or

(c) habitually secures orders in India, mainly or wholly for the nonresident or for that non-resident and other non-residents controlling, controlled by, or subject to the same common control as that nonresident.

Provided that such business connection shall not include any business activity carried out through a broker, genera) commission agent or any other agent having an independent status, if such broker, general commission agent or any other agent having an independent status is acting in the ordinary course of his business:–

Provided further that where such broker, general commission agent or any other agent works mainly or wholly on behalf of a non-resident (hereafter in this proviso referred to as the principal non-resident) or on behalf of such non-resident and other nonresidents which are controlled by the principal non-resident or have a controlling interest in the principal non-resident or are subject to the same common control as the principal nonresident, he shall not be deemed to be a broker, general commission agent or an agent of an independent status.

Explanation 3.–Where a business is carried on in India through a person referred to in clause (a) or clause (b) or clause (c) of Explanation 2, only so much of income as is attributable to the operations carried out in India shall be deemed to accrue or arise in India”.

(ii) income which falls under the head “Salaries”, if it is earned in India. ”

19. Explanation 4 which came to be inserted vide Finance Act, 2012 with effect from 1-4-1962, reads thus :–

“For the removal of doubts, it is hereby clarified that the expression “through” shall mean and include and shall be deemed to have always meant and included “by means of”, “in consequence of’ or “by reason of”.”

20. Thus, after the insertion of Explanation 4, income arising through, by means of, in consequence of or by reason of any business connection in India, or through, by means of, in consequence of or by reason of or from any property in India, or through, by means of, in consequence of or by reason of or from any asset or source of income in India, or through, by means of, in consequence of or by reason of the transfer of a capital asset situate in India, would be deemed to accrue or arise in India.

21. Examining the facts of the present case in the light of the above provision, there is nothing on record to show that the overseas agent has any business connection as contemplated under Explanation 2 to section 9 of the Act. No income has accrued to the overseas agent from any property in India, nor has any income accrued from any asset in India or from the transfer of any capital asset situate in India. According to the learned counsel for the appellant, the income is deemed to accrue or arise from a source of income in India, namely, that the overseas agent is paid by the assessee from India. According to the appellant, the right to receive the commission arose in India when the order was executed by the assessee in India. In this case the source of income for the overseas agents is the services rendered abroad by them to the assessee by way of searching prospective foreign buyers/clients and the payment is received by them directly outside India in their country. Thus, the nonresident overseas agents have offered services to procure export sales order. All these services are rendered abroad, only the payment is made by the assessee from India. Insofar as the nonresident overseas agent is concerned, the source of income is the transaction whereby services are offered by them to the assessee by procuring export sales orders abroad. The overseas agents do not have any permanent establishment or any business connection in India nor is the source of income through, by means of, in consequence of or by reason of any source of income in India. The revenue is trying to confuse two aspects, namely, it is trying to equate the source of payment with the source of income. Insofar as the source of income, it is not the place from where the payment is made, but the place where the transaction which yields such income has taken place. As discussed earlier, the source of income is the services rendered by the overseas agent abroad and not the payment made by the assessee, and hence, it cannot be said that any income accrues of arises to the overseas agent India as contemplated in section 9 of the Act.

22. Under sub-section (2) of section 5 of the Act, insofar as a non-resident is concerned, the income should have been received or deemed to be received in India in such year; or should accrue or arise or deemed to accrue or arise to him in India during such year. In the facts of the present case, neither of the conditions is satisfied. Therefore, when the commission paid to the non-resident agents was neither received or deemed to be received in India nor accrued or was deemed to accrue in India, no income was chargeable to tax under the provisions of the Act. When the payment made by the assessee to the overseas agent for services rendered abroad is not income chargeable to tax in India, there was no obligation cast upon the respondent assessee to deduct tax at source under section 195 of the Act and consequently, the provisions of section 40(a)(ia) of the Act would not be attracted. The Tribunal, therefore, did not commit any error. No question of law can therefore, be said to arise.

23. Another contention advanced on behalf of the appellant is that if the assessee was not liable to deduct tax at source under section 195 of the Act in respect of the payment made to the overseas agents, it ought to have made an application under sub-section (2) of section 195 of the Act seeking exemption from deducting tax at source. In this regard it may be noted that sub-section (2) of section 195 starts with the words “where the person responsible for paying any sum chargeable under the Act to a non-resident”, therefore, for the purpose of falling within the ambit of sub-section (2) of section 195 of the Act, the person should be responsible for paying any sum chargeable under the Act. In the facts of the present case, the sum paid by the assessee to the overseas agent not being chargeable to tax under the Act, there is no question of making an application under sub-section (2) of section 195 of the Act. Besides, this controversy is no longer res integra. The Supreme Court in GE Technology Centre (P) Ltd. v. CIT, (supra) has observed thus :–

“10. In CIT v. Cooper Engg. Ltd. ((1968) 68 ITR 457 (Bom) : 1968 TaxPub(DT) 0254 (Bom-HC) ) 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, then no tax is deductible at source even though the assessee had not made an application under section 18 (3-B) (now Section 195(2) of the Income Tax Act). The application of section 195(2) presupposes that the person responsible for making the payment to the non-resident is in no doubt that tax is payable in respect of some part of the amount 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 be deducted. In such a situation, he is required to make an application to Income Tax Officer (TDS) for determining the amount. It is only when these conditions are satisfied and an application is made to Income Tax Officer (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 Income Tax Act to obtain a NOC from the Department that no tax was due. That certificate was required to be given to RBI for making remittance. It was held in Czechoslovak Ocean Shipping International Joint Stock Co. v. ITO ((1971) 81 ITR 162 (Cal) : 1971 TaxPub(DT) 0084 (Cal-HC) ) that an application for NOC cannot be said to be an application under section 195(2) of the Act.”

24. In the light of the above discussion, it is not possible to state that the impugned order passed by the Tribunal gives rise to any question of law, much less, a substantial question of law, so as to warrant interference. The appeals, therefore, fail, and are accordingly dismissed.

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