2016 (3) TMI 1075 - HC - Income Tax

TDS u/s 195 - Disallowance u/s 40(a)(ia) - non-deduction of tax at source on payments of commission to non-resident sales agents - Held that - Before effecting deduction at source one of the aspects to be examined is whether such income is taxable in terms of the Income Tax Act. This aspect has not been considered by learned Tribunal while concluding that the Appellant has committed a default in not deducting the tax at source. We find it appropriate in the interest of justice to quash and set aside the impugned order of the learned Tribunal to the extent it holds that the Appellant has defaulted in not deducting tax at source and remand the matter to the learned Tribunal to examine the said aspect afresh. The impugned order passed by the learned Tribunal only to the extent it holds that the Appellant has committed default under section 40(a)(ia) of the Income Tax Act 1961 is quashed and set aside

Summary

Issues:
1. Whether the ITAT was justified in upholding disallowance u/s 40(a)(ia) for non-deduction of tax on commission payments to non-resident sales agents.
2. Whether the Tribunal erred in remanding the matter to the Assessing Officer to examine if the transaction is speculative.

Analysis:

Issue 1:
The Appellant argued that the ITAT misconstrued Explanation 2 to Section 195 of the Finance Act, 2012, by concluding that tax deduction at source was necessary even if the non-resident's income was not taxable in India. The Appellant contended that the commission paid to the non-resident was not taxable in India, as confirmed by the CIT(A), and therefore, no deduction at source was required. The Appellant cited a Division Bench judgment to support their position. The Respondent, however, supported the ITAT's decision, stating that tax deduction at source was mandatory under Section 195 of the Income Tax Act, regardless of the tax liability of the non-resident. The High Court found that the ITAT failed to consider whether the income was taxable before ordering tax deduction at source. Therefore, the High Court partially allowed the appeal, quashed the ITAT's order, and remanded the matter for fresh consideration.

Issue 2:
Regarding the second issue of remanding the matter to the Assessing Officer to determine if the transaction was speculative, the High Court accepted the Respondent's argument that there was no substantial question of law on this point. The Court kept all contentions open for the Appellant on this matter. The High Court emphasized the need to re-examine the tax deduction at source issue in light of a relevant Division Bench judgment, which was not available during the ITAT's decision. Consequently, the High Court set aside the ITAT's order on the tax deduction issue and directed a fresh examination by the Tribunal after hearing both parties. The High Court disposed of the appeal accordingly, allowing it in part and restoring the matter to the Tribunal for reconsideration.

In conclusion, the High Court's judgment addressed the issues of tax deduction at source on commission payments to non-resident agents and the remand for assessing the speculative nature of the transaction. The judgment provided detailed analysis, citing legal provisions and precedents to support the decision to partially allow the appeal and remand the matter for fresh consideration.