2015 (6) TMI 708 - AT - Income Tax

Disallowance u/s 40(a)(i) - Export Sales Commission payments made to the non resident u/s.195 - CIT(A) deleted the disallowance - whether the assessee s commission payments made to its overseas agents in lieu of procuring export orders amount to fee for technical services or not u/s 9(1)(vii)? - Held that - Section 9(1)(vii)(b) has to be taken as part of section 9(1)(vii). Once the former provision stipulating fee for technical services itself is not applicable, latter limb cannot be invoked in isolation. We make it clear that there is no evidence placed on record proving any technical services element in procurement of export orders. It is evident that the assessee s overseas export agents have merely collected export orders in lieu of direct remittances. We find that the hon ble jurisdictional high court in CIT vs Faizan Shoes Pvt. Ltd. 2014 (8) TMI 170 - MADRAS HIGH COURT has held in identical circumstances that such an export commission payment does not amount to fee for technical services . The Revenue heavily relies on the case law of Transmission Corporation of Andhra Pradesh vs CIT - 1999 (8) TMI 2 - SUPREME Court . The hon ble apex court has itself distinguished the said case law in GE India Technology Cen. P. Ltd vs CIT 2010 (9) TMI 7 - SUPREME COURT OF INDIA in clear terms that section 195 would only apply if the payment in question is taxable as income in India and not otherwise. The said issue stands already decided against the Revenue. - Decided in favour of assessee.

Summary

Issues Involved:
1. Deletion of disallowance under section 40(a)(i) of the Income-tax Act, 1961.
2. Obligation to deduct tax at source under section 195 of the Income-tax Act, 1961 for export sales commission payments to non-residents.

Issue-wise Detailed Analysis:

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

The Revenue appealed against the orders of the Commissioner of Income-tax (Appeals) [CIT(A)] deleting disallowances under section 40(a)(i) for Rs. 2,16,29,463 and Rs. 78,54,319, respectively. The CIT(A) had ruled in favor of the assessees, holding that they were not liable to deduct tax at source on export sales commission payments made to non-residents under section 195 of the Act. The Revenue contended that section 40(a)(i), amended by the Finance Act, 2004, mandates disallowance of any payment made outside India or to a non-resident without TDS. They argued that Explanation 2 to section 195, inserted by the Finance Act, 2012, deems such income to accrue or arise in India, regardless of the non-resident's place of business or service location.

2. Obligation to Deduct Tax at Source under Section 195:

The Revenue's main argument was that the assessees failed to obtain a certificate under section 195(2) to be exempt from TDS, thus justifying the disallowance under section 40(a)(i). The CIT(A) had relied on decisions from the ITAT in similar cases where payments to non-residents for procuring export orders were not considered technical or managerial services and were not taxable in India. The CIT(A) observed that the non-resident agents operated outside India, rendering services abroad without any business connection or permanent establishment (PE) in India. Therefore, the payments did not attract TDS under section 195.

Judgment Analysis:

The Tribunal upheld the CIT(A)'s decision, confirming that the commission payments to non-resident agents for procuring export orders did not amount to 'fee for technical services' under section 9(1)(vii) of the Act. The Tribunal noted that there was no evidence of technical services involved in the procurement of export orders. They referenced the jurisdictional high court's decision in CIT vs Faizan Shoes Pvt. Ltd., which held that such export commission payments do not constitute 'fee for technical services'. The Tribunal further cited the Supreme Court's ruling in GE India Technology Cen. P. Ltd vs CIT, which clarified that section 195 applies only if the payment is taxable as income in India. Consequently, the Tribunal dismissed the Revenue's appeals, affirming that the assessees were not obligated to deduct TDS on the export commission payments, and the disallowance under section 40(a)(i) was not justified.

Conclusion:

The Tribunal's order dismissed the Revenue's appeals, confirming that the export commission payments made to non-resident agents did not require TDS under section 195, and thus, the disallowance under section 40(a)(i) was rightly deleted by the CIT(A). The decision was based on the absence of technical services in the procurement of export orders and the non-taxability of such payments in India. The Revenue's reliance on the case law of Transmission Corporation of Andhra Pradesh was distinguished by the Supreme Court's ruling in GE India Technology Cen. P. Ltd, which was decisive in this context. The judgment was pronounced on February 4, 2015, in Chennai.