Non-resident – Income deemed to accrue or arise in India – Commission paid outside India for obtaining orders outside India – Amount could not be deemed to accrue or arise in India

Non-resident – Income deemed to accrue or arise in India – Commission paid outside India for obtaining orders outside India – Amount could not be deemed to accrue or arise in India

The assessee company was a subsidiary of P of Austria. The assessee was engaged in the trading of sports gear, mainly footwear, apparel and accessories. The purchases by the assessee consisted of import from related parties and unrelated third parties as well as domestic purchases from the local manufacturers. The assessee was also engaged as a sourcing agent in India for footwear and apparel. It identified suppliers who could provide the required products to the specifications and standards required by W of Hong Kong, which was the global sourcing agent for the P group and for performing such services it received a commission of 3% of the freight on board price. The A.O. held that the assessee failed to deduct tax at source in view of the specific provision of section 5(2)(b) read with section 9(1)(i) and the expenses made by the assessee without deducting the tax at source were not permissible keeping in view section 40(a)(i)(B).

The Tribunal deleted the disallowance.

The appeal filed by the Revenue was admitted on the following substantial questions of law:

‘Whether on the facts and in the circumstances of the case, the Tribunal is right in setting aside the disallowance made u/s 40(a)(i) for the sum of Rs. 7,29,13,934 by holding that the income of the non-residents by way of commission cannot be considered as accrued or arisen or deemed to accrue or arise in India as the services of such agents were rendered or utilised outside India and the commission was also paid outside India?’

The Karnataka High Court upheld the decision of the Tribunal and held as under:

‘i) The Supreme Court in the case of CIT vs. Toshoku Ltd. [1980] 125 ITR 525 (SC) while dealing with non-resident commission agents has held that if no operations of business are carried out in the taxable territories, the income accruing or arising abroad through or from any business connection in India cannot be deemed to accrue or arise in India.

ii) The associated enterprises had rendered services outside India in the form of placing orders with the manufacturers who were already outside India. The commission was paid to the associated enterprises outside India. No taxing event had taken place within the territories of India and the Tribunal was justified in allowing the appeal of the assessee.’