2015 (5) TMI 709 - AT - Income Tax

Disallowance of export Commission u/s 40a(i) r.w.s 195 - non deduction of TDS - Held that - The non-resident brokers have not rendered any services in India, therefore, commission income neither accrued nor arose in India in view of the decision of the. Hon'ble Delhi High Court in the case of CIT v. Eon Technology (P.) Ltd. 2011 (11) TMI 20 - DELHI HIGH COURT . Merely because payments have been made from India, the same cannot be made liable to be taxed in India insofar as payment was made to non-resident for the services rendered outside India as was held in the case of Dr. Reddy's Laboratory v. ITO 1995 (12) TMI 93 - ITAT HYDERABAD-A - Decided in favour of assessee.

Issues Involved:
1. Disallowance of Export Commission under Section 40(a)(i) read with Section 195.
2. Confirmation of the disallowance by the Commissioner of Income Tax (Appeals).
3. Charging of interest under Sections 234A, 234B, and 234C.
4. Initiation of penalty under Section 271(1)(c).

Issue-wise Detailed Analysis:

1. Disallowance of Export Commission under Section 40(a)(i) read with Section 195:
The assessee, engaged in exporting cotton yarn and trading fabrics, paid a commission of Rs. 92,14,509 to foreign agents without deducting TDS. The Assessing Officer (AO) disallowed this payment, arguing that the commission income was deemed to have accrued or arisen in India, thus requiring TDS deduction under Section 195. The AO's rationale included the commission's connection to income from exports, the business source in India, and the establishment of a business connection with the assessee.

2. Confirmation of the Disallowance by CIT(A):
The CIT(A) upheld the AO's decision, referencing the ruling by the AAR in the case of SKF Boilers Pvt Limited and the provisions of Sections 5(2)(b) and 9(1)(i). The CIT(A) concluded that the assessee was liable to deduct TDS under Section 195, and since it was not done, the disallowance under Section 40(a)(i) was confirmed. The CIT(A) also referred to the DTAA provisions, similar to those between India and Brazil, to support the decision.

3. Charging of Interest under Sections 234A, 234B, and 234C:
The AO charged interest under Sections 234A, 234B, and 234C due to the disallowance of the export commission. This was a consequence of the primary issue of non-deduction of TDS on the commission payments.

4. Initiation of Penalty under Section 271(1)(c):
The AO initiated penalty proceedings under Section 271(1)(c) for the alleged concealment of income and furnishing inaccurate particulars of income due to the disallowance of the export commission.

Judgment Analysis:

Arguments by Assessee:
The assessee argued that the issue was covered by various judicial pronouncements, including the Supreme Court's decision in GE India Technology Cen. (P.) Ltd. v. CIT, which stated that Section 195 applies only to sums chargeable under the Act. The assessee contended that the commission paid to non-resident agents for services rendered outside India did not accrue or arise in India, and hence, no TDS was required.

Arguments by Revenue:
The Revenue argued that the commission payments indicated specialized services, establishing a business connection in India. The Revenue also pointed out the lack of written agreements and Tax Residency Certificates, making it difficult to ascertain the extent of services rendered and the applicability of DTAA provisions.

Tribunal's Findings:
The Tribunal considered the judicial precedents and the factual matrix. It found that the non-resident brokers rendered services outside India, and there was no establishment in India. Therefore, the commission income neither accrued nor arose in India. The Tribunal relied on the Supreme Court's decision in GE India Technology Cen. (P.) Ltd. and other judicial pronouncements, concluding that Section 195 did not apply when no income was taxable in India. The Tribunal also noted that brokerage payments for non-technical services do not attract Section 9 r.w.s. 195.

Conclusion:
The Tribunal allowed the assessee's appeal, holding that the commission payments to non-resident agents for services rendered outside India were not liable to tax in India. Consequently, the disallowance under Section 40(a)(i) was not justified, and the interest and penalty proceedings were also unwarranted. The appeal of the assessee was allowed, providing relief from the disallowance, interest, and penalty.

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