LAWS(IT)-2015-1-107

WELSPRING UNIVERSAL Vs. JCIT

Decided On January 12, 2015
Welspring Universal Appellant
V/S
Jcit Respondents

JUDGEMENT

(1.) THIS appeal by the assessee is directed against the order passed by the CIT u/s. 263 of the Income -tax Act, 1961 (hereinafter also called 'the Act') on 8.7.14 in relation to the assessment year 2011 -12.

(2.) BRIEFLY stated, the facts of the case are that the assessee is engaged in manufacturing of engineering items. The AO observed during the course of assessment proceedings that a sum of Rs. 23,58,813/ - was paid by the assessee as a foreign commission without deduction of tax at source. On being called upon to justify such non -deduction, the assessee tendered explanation which has been reproduced on pages 2 -4 of the assessment order. Getting convinced with the assessee's submissions, the AO chose not to make any disallowance u/s. 40(a)(i) of the Act. While exercising revisional power u/s. 263 of the Act, the ld. CIT opined that in view of the amendment to section 195, the assessee was liable to deduct tax at source on such payment of commission to foreign parties. Having not done so, the ld. CIT held that the assessment order passed by the AO on this score was erroneous and prejudicial to the interests of the Revenue. In support of his conclusion, the ld. CIT also relied on the opinion of the Authority of Advance Ruling in SKF Boilers and Driers Pvt. Ltd. ( : 343 ITR 385) and Rajiv Malhotra (285 ITR 564). The assessee is aggrieved against the revisional order directing the AO to make disallowance u/s. 40(a)(i) of the Act.

(3.) FIRSTLY , we will endeavour to determine if the amount of commission is taxable in the hands of the non -resident agent. The scope of total income of a non -resident is governed by section 5(2) of the Act. This section provides that all income of a non -resident 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, shall be included in his total income. It is patent that the non -resident did not receive such income in India inasmuch as the assessee made payment for such commission to the non -resident outside India. Section 7 defines 'Income deemed to be received'. It refers to the annual accretion to the balance at the credit of an employee participating in a recognized provident fund; transferred balance in a RPF to some extent; and the contribution made by the Central Government or any other employer to the account of an employee under Pension Scheme referred to in section 80CCD. From the description of the contents of section 7, it can be seen that the commission received by a non -resident cannot be characterized as 'income deemed to be received' in India. The next ingredient of section 5(2) is the income which 'accrues or arises in India.' Since the chargeability to tax under this segment is attracted if the income accrues or arises to the non -resident in India, it becomes crucial to find out the place where income from export commission accrues or arises. In this regard, the source of accrual or arising of income cannot be relevant because the incidence of tax is attached with the place of accrual of income and not its source. Ordinarily, there can be several places involved in a transaction, such as, a place where an agreement is entered into or a place where services are actually performed or a place where the services are utilized or a place where entries are made in the books or a place where consideration is paid or received etc. In the context of rendering of services for procuring export orders by a non -resident from the countries outside India, there can be no way for considering the actual export from India as the place for the accrual of commission income of the non -resident. One should keep in mind the distinction between the accrual of income of exporter from exports and that of the foreign agent from commission. As a foreign agent of Indian exporter operates outside India for procuring export orders and further the goods in pursuance to such orders are also sold outside India, no part of his income can be said to accrue or arise in India. The last component of section 5(2) is income which 'is deemed to accrue or arise' in India. The expression - 'Income deemed to accrue or arise in India' - has been defined in section 9(1) of the Act. Sub -section (1) of section 9 has seven clauses. Clause (i) deals with income accruing or arising, whether directly or indirectly, through or from any business connection in India or from any property in India or through or from any asset or source of income in India or through the transfer of the capital asset situated in India. It is quite apparent that the commission income cannot be associated with the later contents of this clause, namely, any property or asset or source of income in India. At the most, it can be considered as having some 'business connection.' Explanation 3 to section 9(1)(i) provides that if business is carried on in India, only so much of the income as is attributable to the operations carried out in India, shall be deemed to accrue or arise in India. Thus, it is clear that in order to bring any income within the ambit of section 9(1)(i), it is sine qua non that the activity resulting into such income should be carried out in India. Notwithstanding the existence of a business connection in India, as even understood in the widest possible amplitude, an income will fall u/s. 9(1)(i) only to the extent it results from the operations carried out in India. If no operations for earning such income from business connection are carried out in India, the applicability of clause (i) to this extent is ruled out. As, admittedly, the nonresident payee carried out his operations outside India, the command of clause (i) of section 9(1) cannot apply. The other six clauses of section 9(1), namely, clauses (ii) & (iii) dealing with income under the head 'Salaries'; clause (iv) dealing with 'Dividend'; clause (v) dealing with 'Interest'; clause (vi) dealing with 'Royalty'; and clause (vii) dealing with 'Fees for technical services', have no application to the facts and circumstances of the instant case. The amount of commission paid to the nonresident cannot be described as salary or dividend or interest or royalty or fees for technical services.