CIT v. Gujarat Reclaim & Rubber Products (Bombay High Court)

The assessee had made expenditure on account of payments of commission to non-resident agents in respect of sales made outside India. The AO disallowed the expenditure u/s 40(a) for non-deduction of tax at source. The CIT(A) as well as ITAT deleted the disallowance in view of Circulars No. 23 of 1969 and 768 of 2000, holding that the relevant amounts were not chargeable to tax in India, and hence there was no obligation to deduct tax at source. On Revenue’s appeal to High Court, held:

(i) CIT(A) in his order for Assessment Year 2008-09 while allowing the appeal of the Respondent-Assessee places reliance upon the decision of the Tribunal in case of Ardeshi B. Cursetjee which in turn relies upon the decision of the Supreme Court in CIT v/s. Toshoku Ltd. 125 ITR 525 wherein on almost identical facts, the Apex Court held that the commission earned by the non-resident agent who carried on the business of selling Indian goods outside India, cannot be said have deemed to be income which has accrued and/or arisen in India. This view of the CIT(A) for Assessment Year 2008-09 was found acceptable by the Tribunal in its impugned order and applied the same even for Assessment Year 2007-08… The Revenue has not shown any change in the law in the subject Assessment Years which would warrant our not following the Apex Court’s decision;

(ii) Circular No. 23 of 1969 was admittedly in force during the two Assessment Years. It was only subsequently i.e. on 22nd October, 2009 that the earlier Circular of 1969 and its reiteration as found in Circular No.786 of 2000 were withdrawn. However, such subsequent withdrawal of an earlier Circular cannot have retrospective operation as held in UTI v. P. K. Unny 249 ITR 612.