2009 (3) TMI 1044 - AT - Income Tax

Summary

Issues Involved:
1. Deletion of disallowance towards foreign agency commission.
2. Applicability of Section 195 and Section 40(a)(i) of the Income Tax Act.
3. Relevance of CBDT Circulars No. 23 and No. 786.
4. Interpretation of the Supreme Court decision in Transmission Corporation of Andhra Pradesh Ltd. vs. CIT.

Summary:

1. Deletion of Disallowance Towards Foreign Agency Commission:
The Revenue appealed against the Commissioner of Income Tax (Appeals) for deleting the disallowance of Rs. 23,57,715/- towards foreign agency commission. The Assessing Officer had disallowed this amount on the grounds that the commission was paid without deduction of tax at source.

2. Applicability of Section 195 and Section 40(a)(i) of the Income Tax Act:
The Assessing Officer argued that the assessee failed to deduct tax at source as required u/s 195, thereby invoking Section 40(a)(i) to disallow the deduction. The Commissioner of Income Tax (Appeals) disagreed, noting that the services were rendered outside India and thus not chargeable to tax in India, making Section 195 and Section 40(a)(i) inapplicable.

3. Relevance of CBDT Circulars No. 23 and No. 786:
The assessee relied on CBDT Circular No. 23 dated 23.7.1969 and Circular No. 786 dated 7.2.2000, which clarified that commission payments to non-resident agents operating outside India are not taxable in India and thus do not require tax deduction at source. The Commissioner of Income Tax (Appeals) upheld this view, stating that the assessee's case was fully supported by these circulars.

4. Interpretation of the Supreme Court Decision in Transmission Corporation of Andhra Pradesh Ltd. vs. CIT:
The Revenue contended that the Supreme Court decision mandated tax deduction at source irrespective of the income aspect. However, the Commissioner of Income Tax (Appeals) and the Tribunal found that the Supreme Court decision did not apply to cases where the non-resident rendered services entirely outside India. The Tribunal emphasized that the obligation to deduct tax u/s 195 arises only if the payment is chargeable to tax in India.

Conclusion:
The Tribunal upheld the order of the Commissioner of Income Tax (Appeals), concluding that the foreign agency commission paid by the assessee was not chargeable to tax in India, and thus, no tax was deductible u/s 195. Consequently, the disallowance u/s 40(a)(i) was not applicable. The appeal filed by the Revenue was dismissed.