2014 (9) TMI 268 - AT - Income Tax

Non-deduction of TDS on agency / sales commission payments made to non-resident agents Invocation of section 40(a)(i) r.w. section 195 Held that - Following the decision in GE India Technology Centre Private Ltd. Versus Commissioner of Income Tax & Anr. 2010 (9) TMI 7 - SUPREME COURT OF INDIA - The assessee company is engaged in the business of manufacturing an export of leather goods - it is availing the services of certain non-resident agents for procuring export orders for the assessee for which it is paying commission the non-resident agents have no business connection in India nor they have any permanent establishments in India - They are procuring export orders for the assessee - the non-resident agents are operating outside the country and all the services are rendered abroad only - though the non-residents are rendering services to the assessee (Indian company), these services are rendered totally outside the country. In such a situation the payments (commissions) made to such agents are not liable to be taxed in India - sales commission paid by the assessees to non-residents are not chargeable to tax in India, therefore provisions of section 195 are not applicable - in all the cases assessees paid sales commission to its non-resident agents for the services rendered by them outside India and the sales commission is not chargeable to tax in India so as to deduct TDS on such payments under section 195 of the Act the order of the CIT(A) is upheld Decided against Revenue. Restriction of disallowance u/s 14A r.w. Rule 8D Held that - CIT(A) has elaborately considered the issue on analyzing balance sheets of the assessee for the year ending 31.03.2008, 31.03.2009 & 31.03.2010 and the investments made by the assessee for the past 11 years i.e. 31.03.2003 to 31.03.2013 held that total interest free own funds of the assessee ranged from 42.95 crores in the financial year 2002-03 to ₹ 50.20 crores in the financial year 2011-12 - Out of these amounts paid up share capital amount was ₹ 1.20 crores and the balance is reserves and surplus from accumulated profits from the years - These are all non-interest bearing own and free funds available with the assessee company and investments in the partnership firm in none of the years starting from financial year 2002-03 to 2012-13 exceeded the amounts of above free funds available with the assessee company there was no reason to interfere with the findings of the CIT(A) Decided against Revenue.

Summary

Issues Involved:
1. Deletion of disallowance under section 40(a)(i) for non-deduction of tax at source on agency/sales commission payments to non-resident agents.
2. Restriction of disallowance under section 14A read with rule 8D.

Issue 1: Deletion of Disallowance under Section 40(a)(i)

The Revenue appealed against the orders of the Commissioner of Income Tax (Appeals) [CIT(A)] who had deleted the disallowance made by the Assessing Officer (AO) under section 40(a)(i) for non-deduction of tax at source on agency/sales commission payments to non-resident agents. The AO had invoked provisions of section 40(a)(i) read with section 195, holding that the assessee had not deducted TDS on commission payments made to non-residents, thus making the commission non-allowable as a deduction.

The CIT(A), considering the submissions and case law relied upon by the assessee, held that the sales commission paid to non-residents was not chargeable to tax in India as the services were rendered outside India, and thus, the provisions of section 195 did not apply. Consequently, section 40(a)(i) had no application. The CIT(A) relied on the decision of the Hon'ble Supreme Court in the case of GE India Technology Centre (P.) Ltd. v. CIT 327 ITR 456, and other tribunal decisions.

The Tribunal, after hearing both sides and perusing the orders of the lower authorities and case laws, upheld the CIT(A)'s decision. It was noted that the commission was paid to non-resident agents for services rendered outside India, and therefore, the payments were not chargeable to tax in India. Following the Supreme Court decision in GE India Technology Centre (P.) Ltd. and other tribunal decisions, the Tribunal sustained the order of the CIT(A) in deleting the disallowance under section 40(a)(i).

Issue 2: Restriction of Disallowance under Section 14A read with Rule 8D

The Revenue also contested the CIT(A)'s decision to restrict the disallowance under section 14A read with rule 8D to 10% of the income received by way of share of profit from the firm, as opposed to the AO's higher disallowances. The AO had made disallowances based on the provisions of section 14A read with rule 8D, arguing that the assessee claimed share income from the firm as exempt and had made investments in the partnership firm.

The CIT(A), upon analyzing the balance sheets and the nature of investments, concluded that the assessee's own funds were sufficient to cover the investments in the partnership firm, and the packing credit loans were utilized for business purposes. The CIT(A) found that the administrative expenses attributable to the investments were minimal and restricted the disallowance to 10% of the income received from the firm.

The Tribunal, after reviewing the detailed analysis by the CIT(A), upheld the decision. It was noted that the CIT(A) had thoroughly examined the financials and found that the investments did not exceed the assessee's own funds. The Tribunal found no reason to interfere with the CIT(A)'s findings, as the Revenue had not presented any evidence to rebut the CIT(A)'s conclusions.

Conclusion:

In conclusion, the Tribunal dismissed all the appeals of the Revenue, upholding the CIT(A)'s decisions on both issues.