2010 (9) TMI 1147 - AT - Income Tax

Summary

Issues involved: Appeal filed by Revenue against CIT(A) order for AY 2006-07 regarding deletion of disallowance of commission paid to foreign agents due to non-deduction of tax at source.

Summary:

Issue 1: Disallowance of commission payment
The AO disallowed deduction of &8377; 24,86,388/- for non-deduction of tax at source on commission paid to foreign agents. Assessee argued that as agents had no business connection in India, the commission paid outside India was not taxable in India, hence no TDS was required. CIT(A) deleted the disallowance citing Section 195 for tax deduction from payments to non-residents chargeable to tax. It was held that if the payment is not chargeable in India, tax deduction under Section 195 is not applicable. The ITAT Delhi Bench in a similar case ruled that commission paid to non-resident agents for services outside India is not taxable in India, hence no TDS required. Recent judgments emphasized that tax deduction is only required when payment is chargeable to tax in India.

Issue 2: Interpretation of Sections 195 and 40(a)(i)
The ITAT found that as the commission was paid to non-resident agents for services provided and payment made outside India, no income arose in India, making it not chargeable to tax in India. Therefore, no TDS was required u/s 195 and disallowance u/s 40(a)(i) was unwarranted. Recent judicial decisions clarified that tax deduction is mandatory only when payment is taxable in India, ensuring the payer fulfills statutory obligations. The Supreme Court highlighted that Section 195(1) applies to sums chargeable under the Act, making the payer liable only if the payment contains income element. Safeguards like Section 40(a)(i) prevent revenue seepage due to non-deduction of tax at source.

Conclusion:
The ITAT upheld CIT(A)'s decision to delete the disallowance u/s 40(a)(i) as the commission paid to non-resident agents for services outside India was not chargeable to tax in India. The appeal of the Revenue was dismissed based on the above analysis.