2014 (5) TMI 738 - AT - Income Tax

Disallowance u/s 40(a)(ia) of the Act Sales commission paid to foreign agent Applicability fo section 195 of the Act - Held that - There cannot be any dispute with regard to the services rendered by the foreign party - The commission bill of M/s. Business International, Bangladesh for USD 3954.38 and also the details of foreign commission from 1.4.2006 to 31.3.2007 furnished by the assessee in the papers furnished clearly substantiate the claim of the assessee as to the services rendered by the foreign party - there was no justification for the CIT(A) to dispute the very rendering of services by the foreign party to the assessee, so as to justify the disallowance under the provisions of S.37(1) itself - the payment has been made by the assessee through direct remittance to the party outside India - there is no reason to dispute the claim of the assessee that it is under no obligation to deduct tax at source in terms of S.195 of the Act - the applicability of provision of S.195(2), since the sum paid to non-resident is outside the scope of income taxable under the Income Tax Act. Relying upon GE India Technology Centre (P.) Ltd. v. CIT 2010 (9) TMI 7 - SUPREME COURT OF INDIA - a person is liable to deduct tax u/s 195(1) only when the payment is made by him is chargeable under the provisions of the Act - The payer becomes an assessee in default only when he fails to fulfil the statutory obligation u/s 195(1) and if payment does not contain the element of income, the payer cannot be made liable - the commission paid by the assessee does not contain any element of income taxable in India, the provisions of S.195 does not apply - In the absence of any certificate with regard to non-taxability of the commission to income-tax in India, it has been decided in Millennium Infocom Technologies Ltd. v. Asstt. CIT 2008 (1) TMI 437 - ITAT DELHI-E - such a certificate from the Department is not essential, as the payer has an option to obtain such a Certificate from the Accountant instead of approaching the Revenue authorities, before making a payment to non-residents - there is no justification for any disallowance in respect of commission payments made by the assessee to its foreign agent, either in terms of Section 40a(ia) or u/s 37(1) of the Act Decided in favour of Assessee.

Summary

Issues:
Disallowance of foreign sales commission under section 40(a)(ia) for non-deduction of tax at source.

Analysis:
The appeal challenged the order of the Commissioner of Income-tax(Appeals) regarding the disallowance of foreign sales commission paid to a foreign agent under section 40(a)(ia) for non-deduction of tax at source. The Assessing Officer disallowed the amount of commission paid by the assessee to a foreign party due to non-deduction of tax at source. The assessee contended that since the payments were remitted abroad directly, there was no obligation to deduct tax. The CIT(A) observed that the foreign party had a branch office in India, making the amount chargeable to tax in India. The CIT(A) further found no evidence of services rendered by the foreign party, leading to the disallowance under section 37(1) as well.

During the appeal, the assessee argued that the commission payment was for services rendered outside India, and thus, no tax deduction was required under section 195(3). The department contended that there was no evidence of services rendered by the foreign party, justifying the disallowance. The Tribunal noted that the commission bill and details of foreign commission substantiated the claim of services rendered by the foreign party. The Tribunal found no justification for the disallowance under section 37(1) as there was no evidence to dispute the rendering of services.

The Tribunal further analyzed the payment made through direct remittance outside India, concluding that there was no obligation to deduct tax at source under section 195. Referring to the scope of section 195, the Tribunal held that since the commission paid did not contain any element of income taxable in India, the provisions of section 195 did not apply. The Tribunal also highlighted that a certificate from the Department regarding non-taxability was not essential, as the payer had the option to obtain such a certificate from the Accountant. Considering the totality of facts and evidence, the Tribunal deleted the disallowance made by the Assessing Officer and upheld by the CIT(A), allowing the grounds of the assessee in the appeal.

In conclusion, the Tribunal allowed the appeal of the assessee, emphasizing that there was no justification for the disallowance of commission payments made to the foreign agent, either under section 40(a)(ia) or section 37(1) of the Act. The Tribunal's decision was based on the lack of evidence disputing the services rendered by the foreign party and the absence of any element of income taxable in India in the commission payments.