DCIT vs. Venkat Shoes Pvt. Ltd.
A.Y. : 2004-2005. Date of Order : 6.3.2009
Income-tax Act, 1961 — Sections 40(a)(i) and S. 195 —
Whether provisions of S. 195 apply only to income chargeable to tax in India —
Held : Yes. Whether in a case where amount paid to non-resident is not
chargeable to tax in India and therefore provisions of Chapter XVII-B are not
applicable, can such an amount be disallowed u/s. 40(a)(i) — Held : No.
Facts :
The assessee paid a sum of Rs.23,57,715 as commission to a
non-resident. The commission was paid for services rendered by the agent
outside India. The assessee did not deduct tax at source on the ground that
the services have been rendered outside India. The AO held that in view of the
ratio of the decision of the Supreme Court in the case of Transmission
Corporation of India the assessee ought to have deducted tax at source. The AO
disallowed this sum u/s. 40(a)(i) since according to the him tax was
deductible on this sum and the assessee had failed in its duty of deducting
tax as per S. 195.
The CIT(A) held that (a) the commission paid by the
assessee was not chargeable to tax in India as per Ss. 4 and 5 of the Act; (b)
the case of the assessee was supported by CBDT Circular No. 786, dated
7.2.2000. Accordingly, he held that the provisions of S. 195 and S. 40(a)(i)
were not applicable. He also accepted the assessee’s contention that the Apex
Court decision in the case of Transmission Corporation of AP Ltd. and Another
mandated deduction of tax at source only when the same is chargeable to tax in
India. Accordingly, he allowed the assessee’s appeal.
Aggrieved, the Revenue preferred an appeal to the Tribunal.
Held :
The Tribunal noted that as the non-resident rendered
services outside India, the amount under consideration could not be said to
have been deemed to accrue or arise in India and also the payment was remitted
abroad and therefore the amount was not exigible to tax in India. The Tribunal
held that since the payment was not chargeable to tax in India, the provisions
of S. 195(2) are not applicable.
The Tribunal also found the case of the assessee to be
fully meeting the criteria laid down by the CBDT in its Circular No. 786,
dated 7th February, 2000 and Circular No. 23, dated 23rd July, 1969 according
to which, no tax is deductible u/s. 195. The Tribunal noted that in view of
the decision of the Apex Court in Azadi Bachao Andolan the circulars of CBDT
are binding on the Revenue authorities.
The Tribunal held that it cannot be said that the decision
of the Apex Court in Transmission Corporation mandates deduction of tax at
source, if non-resident renders service outside India which is not chargeable
to tax. The Hon’ble Court’s exposition in that case was on the premise that at
least some part of the receipt may be chargeable to tax. The Apex Court has
clearly upheld that the obligation of the assessee to deduct tax at source is
limited to the appropriate portion of income chargeable under the Act. So when
there is no income chargeable to tax, the question of deduction at source does
not arise.
