2013 (7) TMI 615 - AT - Income Tax

TDS u/s 195 - Business connection Disallowance u/s 40(a)(i) of the Act - The export commission is paid to the non-resident who rendered the services outside India for the purpose of procuring the order and pursuing the payment from the foreign buyer. Since no services were rendered in India, the income of the foreign agent to whom the commission was paid did not accrue or arise in India, therefore, the assessee was not liable to deduct tax at source. Consequently, the disallowance under Section 40(a)(i) is not called for Held that - In the instant case, facts found by the Assessing Officer did not make out a case of business connection as stipulated in section 9(1)(i) Relying upon the decision of Hon ble Jurisdictional High Court in the case of AMD Metplast P.Ltd. Vs. DCIT - 2011 (12) TMI 320 - Delhi High Court , wherein the observation made was, A was the managing director and in terms of the board resolution was entitled to receive commission for services rendered to the company. It was a term of employment on the basis of which he had rendered service. Accordingly, he was entitled to the amount. Commission was treated as a part and parcel of salary and tax had been deducted at source. A was liable to pay tax on both the salary component and the commission. The payment of dividend was made in terms of the Companies Act, 1956. The dividend had to be paid to all shareholders equally. This position could not be disputed by the Revenue. Dividend was a return on investment and not salary or part thereof. Assessee has paid commission in addition to salary to two of its directors having shareholding of 2.56% - Payment of commission to above two directors is duly supported by the Board s resolution. Both the directors are working full time for the assessee company and the commission paid to them has been considered as salary in their hands and offered for taxation - The payment of commission in the earlier three years i.e. AY 2005-06, 2006-07 & 2007- 08 has been allowed by the Revenue. Moreover, in the subsequent years also, no disallowance out of commission has been made. That the payment of dividend has been made in terms of the Companies Act, 1956 to the shareholders as per their shareholding. On all these facts, the decision of Hon ble Jurisdictional High Court in the case of AMD Metplast P.Ltd. (supra) would be squarely applicable Decided in favor of Assessee

Summary

Issues involved:
1. Disallowance of export commission under Section 40(a)(i) of the Income Tax Act.
2. Deductibility of bonus/commission paid to directors under Section 36(1)(ii).

Issue 1: Disallowance of export commission under Section 40(a)(i) of the Income Tax Act:
- The assessee appealed against the CIT(A)'s order sustaining the addition of Rs.3,42,821/- paid as export commission, citing non-liability to deduct tax at source due to services rendered outside India.
- The counsel relied on a High Court decision in a similar case, emphasizing that income did not accrue or arise in India, hence no tax deduction was required.
- The Tribunal found the issue to be covered in favor of the assessee by the High Court decision, which clarified the taxability of income accruing or arising outside India and the concept of 'business connection' under Section 9(1)(i).
- The Tribunal, following the High Court decision, deleted the disallowance of Rs. 3,42,821/- made under Section 40(a)(i) of the Act.

Issue 2: Deductibility of bonus/commission paid to directors under Section 36(1)(ii):
- The Revenue appealed the deletion of the addition of Rs.30,71,600/- made under Section 36(1)(ii) for bonus/commission paid to directors, arguing that such payments are not deductible if they could have been paid as profit or dividend.
- The Tribunal noted that a High Court decision established that commission paid to directors could be treated as part of salary subject to tax deduction at source, and dividend payments had to be made to all shareholders equally.
- The Tribunal applied the High Court decision to the case, where commission was paid to directors who held a minimal percentage of shares, and the payments were supported by board resolutions and considered as part of salary.
- The Tribunal upheld the CIT(A)'s order, dismissing the Revenue's appeal based on the facts presented and the application of the High Court decision.

In conclusion, the Tribunal ruled in favor of the assessee in both issues, deleting the disallowance of export commission and upholding the deductibility of bonus/commission paid to directors based on relevant legal interpretations and precedents.