$~3&9.
* IN THE HIGH COURT OF DELHI AT NEW DELHI
+ INCOME TAX APPEAL NOS. 280/2013 & 454/2013
Date of decision: 23rd September, 2013
COMMISSIONER OF INCOME TAX-I
..... Appellant
Through Mr. Sanjeev Rajpal, Sr. Standing
Counsel.
versus
ANGELIQUE INTERNATIONAL LTD
..... Respondent
Through Nemo.
CORAM:
HON'BLE MR. JUSTICE SANJIV KHANNA
HON'BLE MR. JUSTICE SANJEEV SACHDEVA
SANJIV KHANNA, J. (ORAL):
Revenue by this appeal under Section 260A of the Income Tax
Act (Act, for short) claims that the assessee had defaulted and failed to
deduct tax at source on commission/discount on sale of
Rs.37,87,26,158/- paid to non-residents situated outside India and who
do not have any office or permanent establishment in India. This
amount of Rs.37,87,26,158/-, actually paid and incurred as
expenditure by the respondent assessee, has been disallowed relying
upon Section 40(a)(i) of the Act.
ITA Nos. 280/2012 & 454/2013 Page 1 of 8
2. Factually, there is no dispute and it is accepted that the payments
were made and are genuine payments. It is accepted that the parties to
whom payments have been made do not have permanent
establishment in India. These third parties were paid for having
procured or obtained export orders, clearance of goods abroad,
support in scheduling timely inspection of goods, insurance,
clearance, follow up, arranging payments etc. The payments made to
these foreign parties were within the limit prescribed by Reserve Bank
of India and were made through proper banking channels.
3. The respondent assessee has relied upon Circular Nos. 23 dated
23rd July, 1969, 163 dated 29th May, 1975 and 786 dated 7th
February, 2000. The latter two circulars were by way of clarification.
4. These circulars were subsequently withdrawn by Circular No.
7/2009 dated 22nd October, 2009. The assessment year in question is
2009-10 and relates to the financial year ending 31st March, 2011.
5. We accept the position that under the circulars, payments made
in form of a commission or discount to the foreign party was not
chargeable to tax in India under Section 9(1)(vii) of the Income Tax
Act, 1961.
6. The aforesaid circulars were referred to in decision of this Court
in Commissioner of Income Tax versus Eon Technology Private
Limited, (2012) 343 ITR 366 (Delhi). Reference was made to
ITA Nos. 280/2012 & 454/2013 Page 2 of 8
decision of the Supreme Court in CIT versus Toshoku Limited, (1980)
125 ITR 525 (SC). This case relates to Assessment Year 1962-63 and
the Indian assessee had paid commission to foreign companies through
whom they had procured export orders. Two questions arose; firstly
what was the effect of entries in the books of accounts of the Indian
assessee and payment to the foreign companies; and secondly whether
procurement of export orders by foreign company for the Indian
company had resulted in business connection. The contentions were
rejected relying upon the aforesaid circulars. In the present case, the
Assessing Officer has not invoked Section 9(1)(i) but relied on Section
9(1)(vii). However, Circular Nos. 23 dated 23rd July, 1969 and 786
dated 7th February, 2000 do not make any such distinction. The
relevant portions of the said circulars were quoted in Eon Technology
Private Limited (supra) and read as under:-
"Circular No. 23, dated July 23, 1969
Foreign agents of Indian exporters.- A
foreign agent of Indian exporter operates in his
own country and no part of his income arises in
India. His commission is usually remitted
directly to him and is, therefore, not received by
him or on his behalf in India. Such an agent is
not liable to income-tax in India on the
commission.
Circular No. 786, dated February 7, 2000
As clarified earlier in Circular No. 23,
ITA Nos. 280/2012 & 454/2013 Page 3 of 8
dated July 23, 1969, (see under section 5)
where the non-resident agent operates outside
the country, no part of his income arises in
India, and since the payment is usually remitted
directly abroad, it cannot be held to have been
received by or on behalf of the agent in India.
Such payments were, therefore, held to be not
taxable in India. This clarification still prevails.
In view of the fact that the relevant sections
(section 5(2) and section 9) have not undergone
and change in this regard. No tax is, therefore,
deductible under section 195 from export
commission and other related charges payable
to such a non-resident for services rendered
outside India."
7. In Uco Bank, Calcutta versus Commissioner of Income
Tax,W.B., (1999) 4 SCC 599, three Judges of the Supreme Court
considered effect of a circular issued under Section 119(1) of the Act
and reference was made to the earlier decisions, including Navnit Lal
C. Javeri versus K.K. Sen, (1965) 56 ITR 198 (SC) and majority
judgment of the Supreme Court in State Bank of Travancore versus
CIT, (1986) 158 ITR 102 and it was observed as under:-
"15. The said circulars under Section 119 of
the Income Tax Act were not placed before the
Court in the correct perspective because the
latter circular continuing certain benefits to the
assessees was overlooked and the withdrawn
circular was looked upon as in conflict with
law. Such circulars, however, are not meant for
contradicting or nullifying any provision of the
statute. They are meant for ensuring proper
administration of the statute, they are designed
to mitigate the rigours of the application of a
particular provision of the statute in certain
ITA Nos. 280/2012 & 454/2013 Page 4 of 8
situations by applying a beneficial
interpretation to the provision in question so as
to benefit the assessee and make the application
of the fiscal provision, in the present case, in
consonance with the concept of income and in
particular, notional income as also the treatment
of such notional income under accounting
practice.
16. In the premises the majority decision
in State Bank of Travancore v. CIT [(1986) 2
SCC 11 : 1986 SCC (Tax) 289 : (1986) 158
ITR 102] cannot be looked upon as laying
down that a circular which is properly issued
under Section 119 of the Income Tax Act for
proper administration of the Act and for
relieving the rigour of too literal a construction
of the law for the benefit of the assessee in
certain situations would not be binding on the
departmental authorities. This would be
contrary to the ratio laid down by the Bench of
five Judges in NavnitLal C. Javeri v. K.K.
Sen [AIR 1965 SC 1375 : (1965) 1 SCR 909 :
(1965) 56 ITR 198] . In fact, State Bank of
Travancore v. CIT [(1986) 2 SCC 11 : 1986
SCC (Tax) 289 : (1986) 158 ITR 102] has
already been distinguished in the case
of KeshavjiRavji and Co. v. CIT [(1990) 2 SCC
231 : 1990 SCC (Tax) 268 : (1990) 183 ITR 1]
by a Bench of three Judges in a similar fashion.
It is held only as laying down that a circular
cannot alter the provisions of the Act. It being
in the nature of a concession, could always be
prospectively withdrawn. In the present case,
the circulars which have been in force are
meant to ensure that while assessing the income
accrued by way of interest on a "sticky" loan,
the notional interest which is transferred to a
suspense account pertaining to doubtful loans
would not be included in the income of the
assessee, if for three years such interest is not
actually received.....
ITA Nos. 280/2012 & 454/2013 Page 5 of 8
17. We do not see any inconsistency or
contradiction between the circular so issued and
Section 145 of the Income Tax Act. In fact, the
circular clarifies the way in which these
amounts are to be treated under the accounting
practice followed by the lender. The circular,
therefore, cannot be treated as contrary to
Section 145 of the Income Tax Act or illegal in
any form. It is meant for a uniform
administration of law by all the Income Tax
Authorities in a specific situation and,
therefore, validly issued under Section 119 of
the Income Tax Act. As such, the circular
would be binding on the Department."
8. Referring to this decision, in Catholic Syrian Bank Limited
versus Commissioner of Income Tax, (2012) 3 SCC 784, it has been
observed that the Central Board of Direct Taxes has statutory right to
issue circulars under Section 119 of the Act to explain or tone down
the rigours of law and to ensure fair enforcement of the provisions.
Circulars issued have force of law and are binding of the Income Tax
authorities though they cannot be enforced adversely against the
assessee. Normally these circulars cannot be ignored. Thus a circular
may not override or detract from the provisions of the Act but can seek
to mitigate the rigour of a particular provision for the benefit of an
assessee in specified circumstances.
9. First circular in question had been in force for a long time, from
1969. The Board may have withdrawn this circular and other circulars
vide Circular No. 7 dated 22nd October, 2009 but the said withdrawal
ITA Nos. 280/2012 & 454/2013 Page 6 of 8
cannot be retrospective. Circular No. 7 of 2009 cannot be classified as
explaining or clarifying the earlier circulars issued in 1969 and 2000.
This assertion in the assessment order is far-fetched and does not merit
acceptance. Circular No. 7 does not clarify the earlier circulars but
withdraws them. This is obvious and apparent. Circulars in force in
the relevant assessment year have to be taken into consideration and
should not be ignored.
10. So long as the circulars were in force, it aided in uniform and
proper administration and application of the provisions of the Act.
Read in this manner, we do not think the respondent-assessee was in
default and had failed to deduct at source, though it was mandated and
required. The respondent was entitled to rely upon the circulars. In
light of the judgments of the Supreme Court in CIT versus Eli Lilly
Company (India) Private Limited, (2009) 312 ITR 225 (SC) and G.E
India Technologies Centre Private Limited versus CIT, (2010) 327
ITR 456 (SC), once the income was not exigible or chargeable to tax,
TDS was not required to be deducted. Money paid to the third parties,
who did not have any office or permanent establishment in India, was
exempt and not chargeable to tax. Thus on the said payments or
income, TDS was not required to be deducted. We also note that the
payments in question were made prior to circular No. 7/2009. On this
aspect, there is no dispute. We, therefore, do not find any reason to
ITA Nos. 280/2012 & 454/2013 Page 7 of 8
interfere with the order passed by the tribunal deleting the addition
made by the Assessing Officer under Section 40(a)(i) of the Act. The
appeal, being devoid of merit, is dismissed.
SANJIV KHANNA, J.
SANJEEV SACHDEVA, J.
SEPTEMBER 23, 2013
VKR/kkb
ITA Nos. 280/2012 & 454/2013 Page 8 of 8
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