2014 (8) TMI 170 - HC - Income Tax

Payment towards overseas agents commission Commission paid to non-residents u/s 40(a)(i) TDS not deducted u/s 195 - Agent s service u/s 9(1)(vii) r.w section 9(2) Held that - The plea of the revenue cannot be accepted that commission paid by the assessee to the non-resident agent would come under the term fees for technical services - for procuring orders for leather business from overseas buyers wholesalers or retailers, the non-resident agent is paid 2.5% commission on FOB basis - The opening of letters of credit for the purpose of completing export obligation is an incident of export and the non-resident agent is under an obligation to render such services to the assessee, for which commission is paid - The non-resident agent does not provide technical services for the purposes of running of the business of the assessee in India - The services rendered by the non-resident agent can at best be called as a service for completion of the export commitment - the commission paid to the non-resident agent will not fall within the definition of fees for technical services. The non-resident assessees did not carry on any business operations in the taxable territories - They acted as selling agents outside India - The receipt in India of the sale proceeds of tobacco remitted or caused to be remitted by the purchasers from abroad does not amount to an operation carried out by the assessees in India as contemplated by cl. (a) of the Explanation to s. 9(1)(i) of the Act - The commission amounts which were earned by the non-resident assessees for services rendered outside India cannot, therefore, be deemed to be incomes which have either accrued or arisen in India - relying upon Commissioner of Income-Tax, AP Versus Toshoku Limited (and Another Appeal) 1980 (8) TMI 2 - SUPREME Court - the services rendered by the non-resident agent can at best be called as a service for completion of the export commitment and would not fall within the definition of fees for technical services - Section 9 of the Act is not applicable to the case on hand and section 195 of the Act does not come into play Decided against Revenue.

Issues Involved:
1. Disallowance of commission payment to non-resident agent under Section 40(a)(i) for non-deduction of TDS under Section 195.
2. Nature of services rendered by the non-resident agent and applicability of Section 9(1)(vii) and Explanation to Section 9(2) of the Income Tax Act.
3. Determination of whether the commission payment is deemed to have accrued or arisen in India as per Explanation inserted by Finance Act, 2010.

Issue-Wise Detailed Analysis:

1. Disallowance of Commission Payment to Non-Resident Agent under Section 40(a)(i) for Non-Deduction of TDS under Section 195:
The Assessing Officer disallowed the commission paid by the assessee to the non-resident agent under Section 40(a)(i) of the Income Tax Act, contending that the payment was subject to tax deduction at source under Section 195. The officer argued that the payment was deemed to have arisen in India under Section 9(1) of the Act. However, the Commissioner of Income Tax (Appeals) and the Tribunal held that the commission payments to the non-resident agent were not chargeable to tax in India, thus Section 195 was not applicable. Both authorities relied on the Supreme Court's decision in GE India Technology Cen. (P) Ltd. v. CIT, concluding that the payments were not for technical services and therefore not taxable in India.

2. Nature of Services Rendered by the Non-Resident Agent and Applicability of Section 9(1)(vii) and Explanation to Section 9(2) of the Income Tax Act:
The Revenue argued that the services rendered by the non-resident agent, including procuring orders and arranging letters of credit, fell under "fees for technical services" as per Explanation (2) to Section 9(1)(vii). However, the Commissioner of Income Tax (Appeals) and the Tribunal found that the services were purely for procuring contracts and did not involve any technical or managerial services. The Tribunal emphasized that the non-resident agent did not provide any technical services for the running of the assessee's business in India. The High Court concurred, stating that the commission paid was for services related to the completion of export obligations and did not qualify as fees for technical services.

3. Determination of Whether the Commission Payment is Deemed to Have Accrued or Arisen in India as per Explanation Inserted by Finance Act, 2010:
The Revenue contended that under the Explanation to Section 9(2), inserted by the Finance Act, 2010, the income of a non-resident is deemed to accrue or arise in India, irrespective of whether the non-resident has a place of business or has rendered services in India. The High Court, however, referred to the Supreme Court's decision in Commissioner of Income Tax v. Toshoku Limited, which held that commission earned by non-resident agents for services rendered outside India cannot be deemed to have accrued in India. The High Court found the facts of the present case similar to Toshoku Limited and concluded that the commission paid to the non-resident agent did not fall within the scope of Section 9(1)(vii) and thus was not taxable in India.

Conclusion:
The High Court dismissed the Revenue's appeal, upholding the decisions of the Commissioner of Income Tax (Appeals) and the Tribunal. It was concluded that the commission payments to the non-resident agent were not chargeable to tax in India, and therefore, the provisions of Section 195 did not apply. The court found no infirmity in the Tribunal's order and answered the substantial questions of law against the Revenue. The appeal was dismissed with no costs.

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