2015 (1) TMI 736 - AT - Income Tax

Revision u/s 263 - AO chose not to make any disallowance u/s 40(a)(i) on foreign commission received - Held that - The amount of commission income for rendering services in procuring export orders outside India is not chargeable to tax in the hands of the non-resident agent and hence no tax is deductible under section 195 on such payment by the payer. Resultantly, no disallowance is called for u/s 40(a)(i) of the Act. At this juncture, it is pertinent to note that we are dealing with an appeal against the order passed u/s 263 of the Act. It is settled legal position that there can be no revision on a debatable issue as held in Malabar Industrial Company Ltd. Vs. CIT (2000 (2) TMI 10 - SUPREME Court) and CIT vs. Max India Ltd. (2007 (11) TMI 12 - Supreme Court of India) wherein held that when two views are possible and the ITO has taken one view with which the CIT does not agree, it cannot be treated as an erroneous order prejudicial to the interest of the Revenue, unless the view taken by the ITO is unsustainable in law. Adverting to the facts of the instant case, it can be seen that the AO, after considering certain decisions relied by the assessee favouring non-deduction of tax at source in the present circumstances, accepted the assessee s contention. The fact that the decision of the Authority for Advance Ruling, relied by the ld. CIT, favours the Revenue s case, at the maximum, makes the issue about deduction of tax at source from foreign commission, a debatable one. In view of such a cleavage of opinion, this debatable issue goes outside the purview of section 263. We, therefore, set aside the impugned order. Decided in favour of assessee.

Issues Involved:
1. Non-deduction of tax at source on foreign commission payments under Section 195 of the Income-tax Act, 1961.
2. Applicability of Section 40(a)(i) for disallowance of expenses due to non-deduction of tax.
3. Interpretation of Sections 5(2) and 9(1) regarding the taxability of income in India.
4. Impact of Explanation 2 to Section 195(1) inserted by the Finance Act, 2012.
5. Relevance of Circulars issued by the CBDT in determining tax liability.
6. Jurisdiction of CIT under Section 263 for revising an assessment order on debatable issues.

Issue-wise Detailed Analysis:

1. Non-deduction of Tax at Source on Foreign Commission Payments:
The assessee paid Rs. 23,58,813 as foreign commission without deducting tax at source. The AO accepted the assessee's explanation that the non-resident agent provided services outside India, and thus, the amount was not chargeable to tax in India. The CIT, however, opined that due to the amendment to Section 195, the assessee was liable to deduct tax at source and held the AO's order as erroneous and prejudicial to the interests of the Revenue.

2. Applicability of Section 40(a)(i) for Disallowance:
The CIT directed the AO to disallow the commission payment under Section 40(a)(i) due to non-deduction of tax at source. The ITAT, however, held that since the commission income was not chargeable to tax in India, there was no obligation on the assessee to deduct tax at source, and thus, no disallowance under Section 40(a)(i) was warranted.

3. Interpretation of Sections 5(2) and 9(1):
The ITAT analyzed Sections 5(2) and 9(1) to determine the taxability of the commission income. It concluded that the commission income neither accrued nor arose in India and was not deemed to accrue or arise in India. The activities resulting in the commission were carried out outside India, and thus, the income was not chargeable to tax in India.

4. Impact of Explanation 2 to Section 195(1):
Explanation 2 to Section 195(1) clarifies that the obligation to deduct tax at source applies to all persons, resident or non-resident, irrespective of the non-resident having a business connection in India. However, the ITAT held that this explanation did not alter the requirement that the income must be chargeable to tax in India for the deduction obligation to arise. Since the commission income was not chargeable to tax, Explanation 2 did not impact the assessee's obligation.

5. Relevance of Circulars Issued by the CBDT:
The CIT relied on the withdrawal of Circulars No. 23 and 786 by Circular No. 7 of 2009 to argue that the commission income was chargeable to tax. The ITAT, however, held that the withdrawal of these circulars did not change the legal position that the commission income was not chargeable to tax in India. The withdrawal merely left the issue open for consideration without altering the underlying taxability.

6. Jurisdiction of CIT under Section 263:
The ITAT emphasized that Section 263 cannot be invoked on debatable issues. Since there were conflicting views on the taxability of the commission income, the issue was debatable. The AO's decision, being one possible view, could not be revised by the CIT under Section 263. The ITAT cited Supreme Court judgments in Malabar Industrial Company Ltd. and Max India Ltd. to support this position.

Conclusion:
The ITAT set aside the CIT's order, holding that the commission income paid to the non-resident agent for services rendered outside India was not chargeable to tax in India. Consequently, there was no obligation on the assessee to deduct tax at source, and no disallowance under Section 40(a)(i) was warranted. The appeal was allowed, and the AO's original assessment order was upheld.

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