2015 (10) TMI 1881 - AT - Income Tax

Disallowance u/s 40(a)(i) - non deduction of TDS u/s.195 on commission paid to foreign agents - Held that - If there are services rendered by non-residents, who have no permanent establishment in India or have any business connection in India, by virtue of which the payment of commission accrued or arose in India then, it is exempted, if the assessee is able to prove that the services were rendered by those non-residents at abroad. In the present case, the assessee has not established the facts on record that the non-resident has rendered services at abroad and there is no business connection in India by producing relevant records, viz., either agreement entered into by the assessee with them or correspondence took between the parties. Without examining these details, we are not in a position to decide the nature of services rendered by the non-resident agent. Therefore, it is appropriate to remit the entire issue back to the file of the AO with direction to the assessee to prove that it was sales commission towards procurement of orders from abroad. Accordingly, the entire issue is remitted back to the file of the AO for fresh consideration and the AO is directed to make necessary enquiry regarding the nature of services rendered by the non-resident agent and the payments made thereof - Decided in favour of assessee for statistical purposes.

Summary

Issues:
1. Disallowance of commission paid to foreign agents under sec.40(a)(i) for alleged failure to deduct tax at source u/s.195 of the I.T. Act, 1961.

Analysis:
The judgment revolves around the disallowance of commission paid to foreign agents by the assessee under sec.40(a)(i) for not deducting tax at source u/s.195 of the I.T. Act, 1961. The assessee, a dealer/exporter of leather chemicals, filed its return for the assessment year 2010-11, admitting a total income of &8377; 43,91,890. The Assessing Officer, after scrutiny, determined the total income at &8377; 1,31,72,810, making disallowance u/s.40(a)(i). The CIT(Appeals) upheld this decision, emphasizing the onus on the assessee to prove with documental evidence that the amount paid to non-residents falls under the category of commission. The assessee contended that the commission paid did not constitute "fees for technical services" and hence was not taxable in India, citing a judgment of the Madras High Court. The assessee argued that the services were rendered abroad, and the income accrued outside India, hence not subject to TDS. However, the Revenue argued that the non-resident agent's income had a business connection in India, making it taxable in India. The Tribunal noted the provisions of sec.40(a)(i) and sec.195 of the Act, emphasizing that the income must be chargeable under the Act for tax deduction. As the assessee failed to provide evidence of the nature of services rendered by the non-resident agent, the Tribunal remitted the issue back to the AO for fresh consideration, directing the assessee to prove that the payments were sales commission for orders from abroad. The appeal was allowed for statistical purposes.

This judgment highlights the importance of proving the nature of services rendered by non-residents to determine tax liability under sec.40(a)(i) and sec.195 of the I.T. Act, 1961. It underscores the necessity for documentary evidence to establish the nature of payments made to foreign agents and the location of income accrual to ascertain taxability. The Tribunal's decision to remit the issue back to the AO emphasizes the need for a thorough examination of the facts and relevant records to determine the tax implications of payments made to non-residents.