I credited commission in my books to a foreign selling agent who works entirely outside India, and remitted it later. Is that commission taxable in India in his hands?
No. The Supreme Court held that a credit entry in the exporter's own books is not receipt by the non-resident: a credit balance without more is only a debt, and a book entry in the debtor's own books is not payment discharging it, so the amounts were neither received nor deemed received in India. Nor did the commission accrue or arise here. Under the Explanation to section 9(1)(i), where all the operations of a business are not carried out in India only the part of the income reasonably attributable to Indian operations is deemed to accrue here - and these agents carried out no operations in India at all.
Decided by the Supreme Court (Supreme Court of India - P.N. Bhagwati and E.S. Venkataramiah JJ; judgment by Venkataramiah J) on 1980-08-29, reported as 1981 AIR 148; 1981 SCR (1) 587; Civil Appeals Nos 782-783 of 1973. It bears on section 9(1)(i), section 5(2), section 161, section 163, section 160 of the Income Tax Act 1961, in Residence & Treaty Benefit and Assessment & Scrutiny matters.
This is still the first authority cited when the department seeks to tax export commission paid to an overseas agent. It answers both limbs at once. On receipt, it draws the line between a credit that leaves the money at the creditor's disposal and one that does not, distinguishing P.V. Raghava Reddi, where the agreement itself required the exporter to open an account in the Japanese company's name and hold the money subject to its instructions, so that the character of the money changed from debt to deposit. On accrual, it states the apportionment rule in the Explanation to section 9(1)(i) in the form practitioners use: no operations in India means no income deemed to accrue in India, however real the business connection. It also holds that the receipt in India of export sale proceeds remitted by foreign buyers is not an operation carried out in India by the agent.
Binding on every court and authority in India.
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Bommidala Kotiratnam, a tobacco dealer at Guntur, was treated as the statutory agent. In the previous year relevant to assessment year 1962-63 he bought tobacco in India and exported it to Japan, where it was sold through Toshoku Ltd, a Japanese company and admittedly a non-resident, appointed his exclusive sales agent in Japan and entitled to commission of three per cent of the invoice amount. The whole sale price was remitted to him in India; he debited his commission account with the commission payable and credited it to the Japanese company's account in his books on 31 December 1961, and remitted the money on 1 February 1962, when a debit entry was made. He had similarly sold tobacco in the same period through a French house, Societe Pour Le Commerce International Des Tabacs, on the same terms but for a different territory, with the same pattern of entries. Before the Income-tax Officer the statutory agent relied on Board Circular (XXVII-I) of 1953 No 26 (II/53) of 17 July 1953, which stated that a foreign agent of an Indian exporter operates in his own country, that no part of his income arises in India, that his commission is usually remitted directly to him and so not received by or on his behalf in India, and that such an agent is not liable to Indian income-tax. The officer nevertheless assessed the sums under section 143(3) read with section 163, relying on this Court's decision in P.V. Raghava Reddi. The Appellate Assistant Commissioner and the Tribunal dismissed the appeals. On a reference under section 256(1), the Andhra Pradesh High Court held the assessments unjustified and answered against the Department, which appealed by special leave.
The appeals were dismissed with costs. Sections 160, 161 and 163 are merely enabling provisions empowering the authorities, at their option, to assess and recover tax from the representative assessee, and it was not disputed that if the income was taxable the statutory agent must pay; the real question was whether the income was taxable at all. It was not. The credit entries in the statutory agent's books did not amount to receipt by the non-residents, because the amounts credited were not at their disposal or control; a credit balance without more only represents a debt, and a mere book entry in the debtor's own books is not payment securing discharge of the debt. So the non-residents neither received nor can be deemed to have received the sums in India. Nor did the commission accrue or arise, or become deemed to accrue or arise, in India. The non-residents carried on no business operations in the taxable territories; they acted as selling agents outside India, and the receipt in India of the sale proceeds remitted by the foreign purchasers is not an operation carried out by them in India within clause (a) of the Explanation to section 9(1)(i). Commission earned for services rendered outside India cannot therefore be deemed to accrue or arise in India, and the High Court was right.
The Court worked through the scheme. Section 5(2) brings into a non-resident's total income what is received or deemed received in India, and what accrues or arises or is deemed to accrue or arise in India; Explanation 1 makes clear that income arising abroad is not deemed received in India merely because it is included in a balance sheet prepared here. Section 9(1)(i) deems income accruing directly or indirectly through or from a business connection in India, or property, assets or a source of income in India, to accrue here - but its Explanation confines that, where all the operations of the business are not carried out in India, to the part of the income reasonably attributable to the operations carried out in India. The Court spelt out the consequence in three steps: all operations in India means the whole income is deemed to accrue here; some operations here means only the attributable part; no operations here means the income accruing abroad through or from a business connection in India cannot be deemed to accrue in India at all. That reading follows R.D. Aggarwal & Co and Carborandum Co, decided on section 42 of the 1922 Act, the predecessor of section 9(1)(i). On the receipt limb the Court distinguished Raghava Reddi on its facts. There the agreement with the Japanese company provided in terms that the exporter should credit the amounts to an account in that company's name and deal with them according to its instructions; once credited, the money was held as a depositee, belonged to the company and was at its disposal, so the character of the money changed from debt to deposit as if credited in a bank, and the company in fact directed part of it to be applied in a particular way. No corresponding term existed in the agreements here. That difference is what carries the receipt point, and the accrual point then rests on where the agents worked.
A credit balance without more only represents a debt and a mere book entry in the debtor's own books does not constitute payment which will secure discharge from the debt.
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Handle my notice → Ask a CA on WhatsAppNo. The Supreme Court held that a credit entry in the exporter's own books is not receipt by the non-resident: a credit balance without more is only a debt, and a book entry in the debtor's own books is not payment discharging it, so the amounts were neither received nor deemed received in India. Nor did the commission accrue or arise here. Under the Explanation to section 9(1)(i), where all the operations of a business are not carried out in India only the part of the income reasonably attributable to Indian operations is deemed to accrue here - and these agents carried out no operations in India at all. This was decided by the Supreme Court (Supreme Court of India - P.N. Bhagwati and E.S. Venkataramiah JJ; judgment by Venkataramiah J) and bears on section 9(1)(i), section 5(2), section 161, section 163, section 160 of the Income Tax Act 1961. It is reported as 1981 AIR 148; 1981 SCR (1) 587; Civil Appeals Nos 782-783 of 1973. This is still the first authority cited when the department seeks to tax export commission paid to an overseas agent. It answers both limbs at once. On receipt, it draws the line between a credit that leaves the money at the creditor's disposal and one that does not, distinguishing P.V. Raghava Reddi, where the agreement itself required the exporter to open an account in the Japanese company's name and hold the money subject to its instructions, so that the character of the money changed from debt to deposit. On accrual, it states the apportionment rule in the Explanation to section 9(1)(i) in the form practitioners use: no operations in India means no income deemed to accrue in India, however real the business connection. It also holds that the receipt in India of export sale proceeds remitted by foreign buyers is not an operation carried out in India by the agent. If it applies to you, the first step is this: Show where the agent's operations were performed. That, and not where the money was credited or where the goods came from, is what the Explanation to section 9(1)(i) turns on.
Bommidala Kotiratnam, a tobacco dealer at Guntur, was treated as the statutory agent. In the previous year relevant to assessment year 1962-63 he bought tobacco in India and exported it to Japan, where it was sold through Toshoku Ltd, a Japanese company and admittedly a non-resident, appointed his exclusive sales agent in Japan and entitled to commission of three per cent of the invoice amount. The whole sale price was remitted to him in India; he debited his commission account with the commission payable and credited it to the Japanese company's account in his books on 31 December 1961, and remitted the money on 1 February 1962, when a debit entry was made. He had similarly sold tobacco in the same period through a French house, Societe Pour Le Commerce International Des Tabacs, on the same terms but for a different territory, with the same pattern of entries. Before the Income-tax Officer the statutory agent relied on Board Circular (XXVII-I) of 1953 No 26 (II/53) of 17 July 1953, which stated that a foreign agent of an Indian exporter operates in his own country, that no part of his income arises in India, that his commission is usually remitted directly to him and so not received by or on his behalf in India, and that such an agent is not liable to Indian income-tax. The officer nevertheless assessed the sums under section 143(3) read with section 163, relying on this Court's decision in P.V. Raghava Reddi. The Appellate Assistant Commissioner and the Tribunal dismissed the appeals. On a reference under section 256(1), the Andhra Pradesh High Court held the assessments unjustified and answered against the Department, which appealed by special leave. The matter was decided on 1980-08-29 by the Supreme Court (Supreme Court of India - P.N. Bhagwati and E.S. Venkataramiah JJ; judgment by Venkataramiah J). On those facts the Supreme Court held as follows. The appeals were dismissed with costs. Sections 160, 161 and 163 are merely enabling provisions empowering the authorities, at their option, to assess and recover tax from the representative assessee, and it was not disputed that if the income was taxable the statutory agent must pay; the real question was whether the income was taxable at all. It was not. The credit entries in the statutory agent's books did not amount to receipt by the non-residents, because the amounts credited were not at their disposal or control; a credit balance without more only represents a debt, and a mere book entry in the debtor's own books is not payment securing discharge of the debt. So the non-residents neither received nor can be deemed to have received the sums in India. Nor did the commission accrue or arise, or become deemed to accrue or arise, in India. The non-residents carried on no business operations in the taxable territories; they acted as selling agents outside India, and the receipt in India of the sale proceeds remitted by the foreign purchasers is not an operation carried out by them in India within clause (a) of the Explanation to section 9(1)(i). Commission earned for services rendered outside India cannot therefore be deemed to accrue or arise in India, and the High Court was right.
The Court worked through the scheme. Section 5(2) brings into a non-resident's total income what is received or deemed received in India, and what accrues or arises or is deemed to accrue or arise in India; Explanation 1 makes clear that income arising abroad is not deemed received in India merely because it is included in a balance sheet prepared here. Section 9(1)(i) deems income accruing directly or indirectly through or from a business connection in India, or property, assets or a source of income in India, to accrue here - but its Explanation confines that, where all the operations of the business are not carried out in India, to the part of the income reasonably attributable to the operations carried out in India. The Court spelt out the consequence in three steps: all operations in India means the whole income is deemed to accrue here; some operations here means only the attributable part; no operations here means the income accruing abroad through or from a business connection in India cannot be deemed to accrue in India at all. That reading follows R.D. Aggarwal & Co and Carborandum Co, decided on section 42 of the 1922 Act, the predecessor of section 9(1)(i). On the receipt limb the Court distinguished Raghava Reddi on its facts. There the agreement with the Japanese company provided in terms that the exporter should credit the amounts to an account in that company's name and deal with them according to its instructions; once credited, the money was held as a depositee, belonged to the company and was at its disposal, so the character of the money changed from debt to deposit as if credited in a bank, and the company in fact directed part of it to be applied in a particular way. No corresponding term existed in the agreements here. That difference is what carries the receipt point, and the accrual point then rests on where the agents worked. In the words reproduced by the source cited on this page: "A credit balance without more only represents a debt and a mere book entry in the debtor's own books does not constitute payment which will secure discharge from the debt."
It was decided by the Supreme Court on 1980-08-29 and is reported as 1981 AIR 148; 1981 SCR (1) 587; Civil Appeals Nos 782-783 of 1973. Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 9(1)(i), section 5(2), section 161, section 163, section 160, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The appeals were dismissed with costs. Sections 160, 161 and 163 are merely enabling provisions empowering the authorities, at their option, to assess and recover tax from the representative assessee, and it was not disputed that if the income was taxable the statutory agent must pay; the real question was whether the income was taxable at all. It was not. The credit entries in the statutory agent's books did not amount to receipt by the non-residents, because the amounts credited were not at their disposal or control; a credit balance without more only represents a debt, and a mere book entry in the debtor's own books is not payment securing discharge of the debt. So the non-residents neither received nor can be deemed to have received the sums in India. Nor did the commission accrue or arise, or become deemed to accrue or arise, in India. The non-residents carried on no business operations in the taxable territories; they acted as selling agents outside India, and the receipt in India of the sale proceeds remitted by the foreign purchasers is not an operation carried out by them in India within clause (a) of the Explanation to section 9(1)(i). Commission earned for services rendered outside India cannot therefore be deemed to accrue or arise in India, and the High Court was right. It arises in Residence & Treaty Benefit and Assessment & Scrutiny matters, on section 9(1)(i), section 5(2), section 161, section 163, section 160 of the Income Tax Act 1961, and was decided by Supreme Court of India - P.N. Bhagwati and E.S. Venkataramiah JJ; judgment by Venkataramiah J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Avoid any term in the agency agreement that puts the credited amount at the non-resident's disposal in India or requires you to hold it to his order - that is exactly what made Raghava Reddi go the other way. Do not rest the case on the 1953 Board circular. The Court decided the appeals on the sections, and circulars of this kind have since been withdrawn. Keep the deduction-at-source question separate and check the current law on it; this judgment decides only whether the commission is chargeable in the non-resident's hands, and section 9 has been amended since.
Still good law. A citator search returns 254 later decisions citing this judgment, the most recent an Ahmedabad Tribunal order of 22 April 2026 (Kiri Industries Limited), which decided the point before it relying on the Supreme Court's judgment in Toshoku. The Kolkata Tribunal in DCIT v ITC Limited (10 May 2024) met the amendment argument head on, holding that in the absence of any such amendment in the provisions of the Act the law laid down by the Supreme Court in Toshoku Ltd continues to hold good. The Jaipur Tribunal applied it in DCIT v M/s JLC Electromet Pvt. Ltd (12 April 2022), holding that no income can be said to accrue or arise in India where payment is made to a non-resident outside India for services rendered outside India, and the Ahmedabad Tribunal applied it again in ACIT v M/s Intas Pharmaceuticals Ltd (21 May 2025). A second search by case name coupled with the word overruled returned 39 decisions, none adverse. Section 9 has been amended repeatedly since 1980 and the specific charge on fees for technical services and on royalties must be checked separately, but the construction of the Explanation to section 9(1)(i) that this case supplies has not been displaced. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The library had carried a second page for this same judgment at /caselaw/case/cit-v-toshoku-ltd-commission-to-a-foreign-selling-agent/; the two have been merged and that address now redirects here. The judgment is inconsistent about the date of the High Court's decision, the cause title giving 18 November 1972 and the opening paragraph 18 November 1971. The Court decided only the chargeability of the commission in the non-residents' hands; it did not address deduction at source or the disallowance of the payment in the exporter's own assessment, both of which the batch line refers to and neither of which the judgment discusses. Nor did it decide what weight the 1953 Board circular carried, having decided the appeals on the sections. The harvested page carries an editorial headnote before the judgment, which is not used here, and gives only two citations. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeals were dismissed with costs. Sections 160, 161 and 163 are merely enabling provisions empowering the authorities, at their option, to assess and recover tax from the representative assessee, and it was not disputed that if the income was taxable the statutory agent must pay; the real question was whether the income was taxable at all. It was not. The credit entries in the statutory agent's books did not amount to receipt by the non-residents, because the amounts credited were not at their disposal or control; a credit balance without more only represents a debt, and a mere book entry in the debtor's own books is not payment securing discharge of the debt. So the non-residents neither received nor can be deemed to have received the sums in India. Nor did the commission accrue or arise, or become deemed to accrue or arise, in India. The non-residents carried on no business operations in the taxable territories; they acted as selling agents outside India, and the receipt in India of the sale proceeds remitted by the foreign purchasers is not an operation carried out by them in India within clause (a) of the Explanation to section 9(1)(i). Commission earned for services rendered outside India cannot therefore be deemed to accrue or arise in India, and the High Court was right.
TaxSphere, “CIT v Toshoku Ltd”, https://taxnotice.vittsphere.com/caselaw/case/cit-v-toshoku-ltd-commission-to-a-foreign-selling-agent/ (validity last checked 2026-08-29)
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