2012 (12) TMI 838 - AT - Income Tax

Non-deduction of TDS on payment of Export Commission - disallowance u/s 40(a)(ia) - CIT(A) deleted the addition - Held that - Incontrovertible evidence on record that the payment of commission has been made to agents outside India for services rendered outside India. The relationship between the assessee and the agents are principal to principal. The agents to not have any PE in India. Any tax that would accrue or arise is only outside the country and not in India. Very importantly this payment does not also fall within the ambit of Section 9(1)(vii) as the services under consideration is not for any technical service rendered nor could be taken as a job which was managerial in nature. It is only for facilitation of the sales of the assessee outside India. There was no agreement between the assessee and the agents and no such agreement was even required, since the transaction was of payment of commission for services rendered- as decided in CIT, A. P. Versus Toshoku Limited (and Another Appeal) 1980 (8) TMI 2 - SUPREME COURT sales commission which were earned by the non resident for services rendered outside India could not be deemed to be income which had either accrued or arisen in India - Thus the assessee was held not to be liable for TDS under Chapter XVII-B of the Act - against revenue. Addition on account of retention money - Held that - The facts are that the customer retains money in respect of a completed contract for satisfactory performance of the contract for which the due diligence is undertaken. On demonstration of satisfactory performance of the contract, the money as released finally to the assessee, otherwise it has to repair the fault or pay liquidated damages. Thus such money withheld by the customer does not accrue as income to the assessee on completion of the turn-key project, the reason being that right to receive the money does not accrue to the assessee. This money accrues as income when the stipulated condition is satisfied which may be in the nature of showing satisfactory performance of the project. Therefore, the amount is taxable on accrual basis in the year in which stipulated condition is satisfied. Thus following the Tribunal s order in the assessee s own case for AY 2007-08 the amount in question does not accrue as income to the assessee on raising the bill after completion of the project. Rather, the income arises on performance of the conditionalities of the agreement - against revenue.

Summary

Issues Involved:
1. Deletion of addition of Rs. 37,87,26,158/- under Section 40(a)(ia) on account of non-deduction of TDS on payment of export commission.
2. Deletion of addition of Rs. 1,23,57,341/- on account of retention money.

Issue-wise Detailed Analysis:

1. Deletion of Addition of Rs. 37,87,26,158/- under Section 40(a)(ia) on Account of Non-Deduction of TDS on Payment of Export Commission:
The Assessing Officer (AO) added Rs. 37,87,26,158/- under Section 40(a)(ia) of the IT Act, observing that the assessee had debited this amount as commission/discount on sales without deducting TDS. The AO argued that the commission paid to foreign agents should be classified as "fee for technical services" under Section 9(1)(vii) of the IT Act, which mandates TDS deduction. The AO further noted that the assessee failed to produce agreements with the non-resident agents and did not furnish any explanation regarding the increase in turnover due to the commission payment.

The CIT (A) deleted this addition, following the first appellate order for Assessment Year 2008-09, concluding that the relationship between the assessee and agents was on a principal-to-principal basis, and the agents did not have a Permanent Establishment (PE) in India. The CIT (A) held that the payments were made for services rendered outside India and could not be classified as fees for technical services. The Tribunal upheld the CIT (A)'s decision, noting that similar facts and circumstances were present in the case for Assessment Year 2008-09 and that the payments did not accrue or arise in India.

2. Deletion of Addition of Rs. 1,23,57,341/- on Account of Retention Money:
The AO added Rs. 1,23,57,341/- on account of retention money, arguing that under the mercantile system of accounting, the retained money constituted income accrued to the assessee and was taxable in the relevant year. The AO contended that any sums not given out of the retention money could be considered expenses.

The CIT (A) deleted this addition, following CIT (A)'s orders for Assessment Years 2007-08 and 2008-09. The Tribunal upheld the CIT (A)'s decision, referencing its own order for Assessment Year 2007-08, which held that retention money does not accrue as income upon completion of a project but only upon fulfilling the stipulated conditions of the agreement. The Tribunal concluded that the facts for the year under consideration were not different from those of the previous years, and hence, the retention money did not accrue as income in the relevant year.

Conclusion:
The Tribunal dismissed the department's appeal, confirming the CIT (A)'s deletion of additions for non-deduction of TDS on export commission and retention money, as the payments did not accrue or arise in India and the retention money did not constitute income until the stipulated conditions were met.