2016 (5) TMI 1351 - AT - Income Tax

TDS u.s 195 - commission paid to the non-resident agents - non deduction of tds - P.E. in India - Held that - The said payment are covered by Circular Nos.23 dated 23rd July, 1969 and No. 786 dated 7th February, 2000 in this regard which clarifies that commission to the non-resident agent operating outside the country, where no part of his income arises in India, would not be taxable in India. Commission paid to one agent having no PE in India, are not liable to tax in India as no taxable income accrues or arose to such agents in India, therefore, the assessee was not required to deduct tax at source while making payment to such commission agent. In view of the above, we do not find any merit in the disallowance so made by the AO. See Indo Industries Ltd. Versus Income-tax Officer, 2 (2) (2) (1) , Mumbai 2015 (5) TMI 709 - ITAT MUMBAI - Decided in favour of assessee. Disallowance u/s.14A/36(1)(iii) - Held that - there is no infirmity in the order of CIT(A) for restoring the matter back to the file of AO for recalculating the disallowance u/s.14A/36(1)(iii) as per the directions given by the Tribunal in its order for the assessment year 2004-05 and 2006-07 it is held that the action of the AO in making the additions under the sections under discussion is upheld but to maintain a rule of consistency and to bring the correct income to taxation, the AO is directed to take necessary action regarding the calculation of the quantum of disallowance that has to be made in the case of the appellant following the directions as given in AY 2007-08 by the CIT(A). Here the AO is also directed to ensure that in the recalculation so done, double disallowance of the same expenditure claimed does not occur.

Summary

Issues:
1. Disallowance of commission on export sales under section 40(a)(i) of the Act.
2. Interpretation of Circular Nos. 23 dated 23rd July, 1969 and No. 786 dated 7th February, 2000 regarding taxation of commission to non-resident agents.
3. Application of the decision in the case of Indo Industries Ltd. 53 taxman.com 458 on tax liability of commission paid to agents without a Permanent Establishment in India.
4. Re-working disallowance under sections 14A/36(1)(iii) by the CIT(A) and the subsequent appeal by the revenue.

Analysis:

1. The first issue revolves around the disallowance of commission on export sales under section 40(a)(i) of the Act. The Assessing Officer (AO) disallowed the commission paid to non-resident agents due to non-deduction of tax at source. The Commissioner of Income Tax (Appeals) upheld this disallowance. However, the Income Tax Appellate Tribunal (ITAT) found that the commission was paid to agents outside India for services rendered in connection with export sales, where no part of their income arose in India. The ITAT referred to Circular Nos. 23 and 786, which clarified that such commission would not be taxable in India. The ITAT also cited the decision in the case of Indo Industries Ltd., holding that commission paid to agents without a Permanent Establishment in India is not liable to tax in India. Consequently, the ITAT allowed the appeal of the assessee, overturning the disallowance.

2. The second issue pertains to the interpretation of Circular Nos. 23 and 786 regarding the taxation of commission to non-resident agents. The AO ignored these circulars, claiming they were withdrawn by the Central Board of Direct Taxes (CBDT). However, the ITAT noted that the circulars were in force during the relevant assessment year and were binding on the Income Tax Department. By relying on these circulars and the legal precedent, the ITAT concluded that the commission paid to non-resident agents outside India for services related to export sales was not taxable in India.

3. The third issue involves the application of the decision in the case of Indo Industries Ltd. on the tax liability of commission paid to agents without a Permanent Establishment in India. The ITAT reiterated the principle established in this case that commission paid to such agents, where no taxable income accrues in India, is not subject to tax in India. This precedent supported the ITAT's decision to allow the appeal of the assessee and reject the disallowance made by the AO.

4. The final issue concerns the re-working of disallowance under sections 14A/36(1)(iii) by the CIT(A) and the subsequent appeal by the revenue. The CIT(A) had directed the AO to recalculate the disallowance based on the Tribunal's order in the assessee's previous cases. The ITAT found no fault in the CIT(A)'s decision to restore the matter back to the AO for recalculating the disallowance, maintaining consistency and ensuring correct income taxation. Consequently, the ITAT dismissed the appeal of the revenue and allowed the appeal of the assessee, resulting in a favorable outcome for the assessee and upholding the CIT(A)'s decision.