ASSISTANT COMMISSIONER OF INCOME TAX Vs. RAPID PACK ENGG. (P.) LTD.
INCOME TAX APPELLATE TRIBUNAL
ASSISTANT COMMISSIONER OF INCOME TAX
Rapid Pack Engg. (P.) Ltd.
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Vijay Pal Rao, Member (J) -
(1.) THIS appeal by the revenue is directed against the order dated 15.05.2012 of CIT(A) for the assessment year 2009 -10. Revenue has raised following grounds in this appeal: - -
"(i) On the facts and in the circumstances of the case and in the law, the CIT(A) -II, Thane erred deleting the addition of Rs. 25,49,243/ - made by the AO on account of commission paid to non -resident u/s. 40(a)(ia) of the I.T. Act, 1961.
(ii) On the facts and in the circumstances of the case and in law, the CIT(A) -II, Thane erred in not appreciating the fact that circular No. dated 22.10.2009 clearly stipulates that earlier circulars have been withdrawn with immediate effect, meaning thereby that the benefits of earlier circulars are not applicable to the assessee on the date of order.
(iii) On the facts and in the circumstances of the case and in law, the CIT(A) -II, Thane erred in holding that provisions of section 9 r.w. explanation 2 of the I.T. Act, 1961 are not applicable to the assessee's case."
The only issue arises from the ground raised by the revenue is regarding addition of Rs. 25,49,243/ - made by the AO u/s. 40(a)(ia) which was deleted by the CIT(A). The assessee is a private ltd., company engaged in the manufacturing engineering goods used by the pharmaceutical companies for packing capsules and tablets. During the course of assessment proceedings it was noticed by the AO that the assessee company had remitted a commission amounting to Rs. 25,49,243/ - to M/s. Luminous General Trading Co. Dubai on which no tax at source was deducted. The AO asked the assessee to explain as to why the above commission paid should not be disallowed as per the provisions of section 40(a)(ia). In response the assessee submitted that the commission paid to M/s. Luminous Trading, LLC, being a Dubai based company, which has no permanent establishment (PE) in India and the income of the payee did not arise in India, therefore, no tax has been deducted at source u/s. 195. The assessee has placed reliance on the CBDT Circular No. dated 7.2.2000 and submitted that tax liability of foreign agent of Indian exporter does not arise in India as no part of his income arise in India. The AO did not accept the contention of the assessee and place reliance on the Explanation 2 of section 9(1) of the Income -tax Act and held that the commission paid to non resident falls within the ambit of section 9 and accordingly disallowed the same u/s. 40(a)(ia).
(2.) ON appeal CIT(A) has considered the applicability of the Explanation 2 to section 9(1) and held that the payment in question does not fall under clauses (v) to (vii) of section 9(1), therefore, the Explanation 2 to the said section is not applicable. CIT(A) was of the view that the payment in question is not the fee for technical services or royalty, therefore, the Explanation is not applicable. CIT(A) has also considered the provisions of DTAA between India and UAE and held that when the services are rendered outside India, therefore, as per the DTAA between India and UAE the income arising out of the transaction between assessee and the non resident is not liable to tax in India, therefore, not subjected to provisions of deduction of tax at source and consequently the provisions of section 40(a)(ia) are not applicable. Before us, the Ld. DR has submitted that the payment in question is not commission but the real nature of the payment is business income of the non -resident. In support of his contention he has referred the guidelines of RBI under which the remittance of commission is permitted only up to 12.5% of the invoice value. The Ld. DR has submitted that in the case in hand the so called commission pad by the assessee is more than 20% and goes up to 22.5%, therefore, it is a clear violation of RBI guidelines to allow the remittance of the commission only to 12.5% of the invoice. Thus the Ld. DR has submitted that the payment in question is not commission and the real nature of the payment is required to be verified after considering the relevant facts. He has further submitted that the benefit of the treaty between India and UAE is not available to the recipient of the amount because M/s. Luminous Trading is an LLC and not having a tax resident certificate of the UAE. In support of his contention the Ld. DR has relied upon the ruling of Authority for Advance Ruling (AAR) in the case of SKF Boilers & Driers (P.) Ltd., In re :  343 ITR 385 : 206 Taxman 19 : 18 taxmann.com 325. The Ld. DR has further contended that the payment in question falls under section 5(2)(b) which deals with the scope of total income and the income of the non resident includes all income from whatever source derived which accrues or arises or is deemed to accrue or arise in India.
(3.) ON the other hand, the Ld. AR of the assessee has submitted that the AO has not disputed the nature of payment being commission paid to M/s. Luminous General Trading Co. (LLC) and, therefore, the said payment does not fall under the clauses (v) to (vii) of section 9(1) so that the Explanation 2 can be attracted on this amount. He has further submitted that Circular No. of 7.2.2000 was withdrawn on 22.10.2009 and, therefore, the withdrawal of the Circular is prospective and not retrospective. The assessee cannot be supposed to have deducted the tax in respect of the commission paid to the non -resident agent when during the relevant year, the Circular No. dated 7.2.2000 was very much in existence. The subsequent withdrawal of the Circular does not affect the position of the Department and CBDT on this issue during the year under consideration. In support of his contention he has relied upon the following decisions.
"(i) CIT v. Angelique International Ltd. :  359 ITR 9 : 219 Taxman 104 : 38 taxmann.com 425 (Delhi)
(ii) CIT v. Model Exims :  358 ITR 72 (All.)
(iii) CIT v. Allied Exims :  363 ITR 62 (All.)
(iv) Asstt. CIT v. Modern Insulator Ltd. :  20 taxmann.com 335 (JP.)
(v) Dy. CIT v. Divi's Laboratories Ltd. :  131 ITD 271 : 12 taxmann.com 103 (Hyd.)";
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