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October, 08th 2013
+                INCOME TAX APPEAL NOS. 280/2013 & 454/2013

                                         Date of decision: 23rd September, 2013

                                                                  ..... Appellant
                                Through Mr. Sanjeev Rajpal, Sr. Standing


                                                                ..... Respondent
                                Through Nemo.



        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     These circulars were subsequently withdrawn by Circular No.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

                         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

                 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

ITA Nos. 280/2012 & 454/2013                                 Page 8 of 8
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