2016 (2) TMI 798 - HC - Income Tax

Disallowance u/s 40(a)(i) - whether the assessee ought to have deducted tax at source as contemplated under Section 195 of the Act, when the assessee paid commission to foreign agent? - Held that - In the instant case, it is seen, admittedly that the nonresident agents were only procuring orders abroad and following up payments with buyers. No other services are rendered other than the above. Sourcing orders abroad, for which payments have been made directly to the non-residents abroad, does not involve any technical knowledge or assistance in technical operations or other support in respect of any other technical matters. It also does not require any contribution of technical knowledge, experience, expertise, skill or technical know-how of the processes involved or consist in the development and transfer of a technical plan or design. The parties merely source the prospective buyers for effecting sales by the assessee, and is analogous to a land or a house / real estate agent / broker, who will be involved in merely identifying the right property for the prospective buyer / seller and once he completes the deal, he gets the commission. Thus, by no stretch of imagination, it cannot be said that the transaction partakes the character of fees for technical services as explained in the context of Section 9 (1) (vii) of the Act. As the non-residents were not providing any technical services to the assessee, as held above and as held by the Commissioner of Income Tax (Appeals), the commission payment made to them does not fall into the category of fees of technical services and therefore, explanation (2) to Section 9 (1) (vii) of the Act, as invoked by the Assessing Officer, has no application to the facts of the assessee s case. In this case, the commission payments to the nonresident agents are not taxable in India, as the agents are remaining outside, services are rendered abroad and payments are also made abroad.. When the transaction does not atract the provisions of Section 9 of the Act, then there is no question of applying Explanation 4 to Section 9 of the Act. Therefore, the Revenue has no case and the Tax Case Appeal is liable to be dismissed. - Decided in favour of assessee

Issues Involved:
1. Disallowance of commission paid to foreign agents under Section 40(a)(i) of the Income Tax Act, 1961.
2. Applicability of Section 195 of the Income Tax Act concerning Tax Deducted at Source (TDS) on payments to non-residents.
3. Taxability of commission payments to non-resident agents under Section 9(1)(i) and Section 9(1)(vii) of the Income Tax Act.
4. Impact of Explanation 4 to Section 9(1)(i) and Explanation 2 to Section 195(1) of the Income Tax Act, introduced by the Finance Act, 2012.

Detailed Analysis:

1. Disallowance of Commission Paid to Foreign Agents under Section 40(a)(i):
The assessee, engaged in the leather business, paid commission to non-resident foreign agents for procuring export orders. The Assessing Officer disallowed this commission under Section 40(a)(i) of the Income Tax Act, 1961, for non-deduction of tax at source. The CIT (A) reversed this disallowance, stating that the agents were non-residents operating outside India, the services were rendered outside India, the agents had no permanent establishment in India, and the payments were made directly outside India. The CIT (A) relied on the Supreme Court decision in G.E India Technology Cen. P. Ltd. v. CIT, which held that commission payments to non-residents are not deemed to accrue in India, and Section 195 does not apply. The Tribunal upheld the CIT (A)'s decision.

2. Applicability of Section 195 Concerning TDS on Payments to Non-Residents:
The Revenue argued that the assessee should have deducted tax at source under Section 195 when paying commission to foreign agents. The Supreme Court in G.E. India Technology Centre Pvt. Ltd. v. CIT clarified that TDS obligations under Section 195 arise only if the payment is chargeable to tax in the hands of the non-resident recipient. Since the foreign agents did not have a tax liability in India, the assessee's obligation to deduct tax at source did not arise. The Tribunal and CIT (A) both held that the non-resident agents were not providing technical services, and thus, the commission payments did not fall under "fees for technical services" as per Section 9(1)(vii).

3. Taxability of Commission Payments to Non-Resident Agents:
The main issue was whether the commission payments to non-resident agents were taxable in India. The court noted that the agents were only procuring orders and following up on payments, which did not involve any technical services. The services provided by the agents did not require technical knowledge or expertise, and thus, the payments did not qualify as "fees for technical services" under Section 9(1)(vii). The court held that the commission payments were not taxable in India as the agents were non-residents, services were rendered abroad, and payments were made outside India.

4. Impact of Explanation 4 to Section 9(1)(i) and Explanation 2 to Section 195(1):
The Revenue contended that the Tribunal should not have relied on the G.E. India Technology case due to the insertion of Explanation 4 to Section 9(1)(i) and Explanation 2 to Section 195(1) by the Finance Act, 2012, with retrospective effect from 01.04.1962. However, the court referred to the decision in Commissioner of Income Tax v. Kikani Exports Pvt. Ltd., which rejected the Revenue's contention and upheld that services rendered by non-resident agents did not fall within the definition of "fees for technical services" and hence, Section 9 was not applicable. Consequently, Section 195 did not apply, and the disallowance made by the Assessing Officer was rightly deleted.

Conclusion:
The court dismissed the Revenue's appeal, confirming the order of the Income Tax Appellate Tribunal. The commission payments to non-resident agents were not taxable in India, and there was no obligation to deduct tax at source under Section 195. The provisions of Section 9 and the corresponding explanations introduced by the Finance Act, 2012, did not apply to the facts of the assessee's case.

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