2018 (4) TMI 1566 - AT - Income Tax

Tds u/s 195 - disallowance u/s 40(a)(i) - Non deduction of tds on commission payment on export as been made to a non-resident Indian - income accrued in India - Held that - In view of the decision rendered in Eon Technology P. Ltd. (2011 (11) TMI 20 - DELHI HIGH COURT) on the basis of decision rendered by Hon ble Supreme Court in case cited as CIT vs. Toshoku Limited (1980 (8) TMI 2 - SUPREME COURT), we are of the considered view that when it is not in dispute that the commission payment on export has been made to a non-resident Indian by the assessee for services rendered abroad and no part of said income has arisen in India, TDS was not required to be deductible at source and disallowance u/s 40(a)(i) is not sustainable in the eyes of law. Moreover, the ld. CIT (A) has meticulously relied upon the provisions contained u/s 90(2) of the Act and Article 7 (1) of the Double Taxation Avoidance Agreement (DTAA) entered into between India and Italy, France, Germany and UK vide which existence of Permanent Establishment (PE) in India is necessary for subjecting to tax business of any entity in India. Since M/s. Sari Oren of France is admittedly a non-resident having no PE in India, the provisions contained u/s 40(a)(ia) are not applicable in this case. - Decided in favour of assessee

Summary

Issues involved:
Disallowance of foreign commission under section 40(a)(ia) read with sec.195 for non-deduction of TDS, interpretation of business connection under Section 9(1)(i) of the Income Tax Act, applicability of Double Taxation Avoidance Agreement (DTAA) provisions.

Analysis:

1. Disallowance of Foreign Commission under Section 40(a)(ia) read with Sec. 195 for Non-Deduction of TDS:
The appellant sought to set aside the order passed by the Ld. CIT (Appeals) regarding the disallowance of &8377; 4,06,78,105/- under section 40(a)(ia) for non-deduction of TDS on payment of foreign commission. The Assessing Officer disallowed the amount and added it to the total income of the assessee. However, the CIT (A) deleted this addition, leading to the Revenue filing an appeal before the Tribunal. The Tribunal, after considering the facts, held that since the non-resident to whom the commission was paid rendered services outside India and no part of the income arose in India, TDS was not required to be deducted at the source. The Tribunal referred to a previous decision of the Delhi High Court in favor of the assessee, emphasizing that the commission payment to a non-resident for services rendered abroad did not necessitate TDS deduction, making the disallowance unsustainable under the law.

2. Interpretation of Business Connection under Section 9(1)(i) of the Income Tax Act:
The Tribunal referred to the interpretation of the term "business connection" as explained by the Supreme Court in various cases to determine whether the income accrued or arose in India. It was highlighted that the activities in India must contribute directly or indirectly to the earning of profits or gains by the non-resident. In this case, the Tribunal found that the Assessing Officer did not establish a business connection as required under Section 9(1)(i) of the Act. The Tribunal emphasized that the commission earned by the non-resident for services rendered outside India could not be deemed to have accrued or arisen in India, aligning with the circulars issued by the CBDT. Therefore, the Tribunal concluded that the business connection was not established based on the facts found by the Assessing Officer, leading to the dismissal of the Revenue's appeal.

3. Applicability of Double Taxation Avoidance Agreement (DTAA) Provisions:
The Tribunal also considered the provisions of Section 90(2) of the Act and Article 7(1) of the DTAA between India and certain countries to determine the existence of Permanent Establishment (PE) in India for tax purposes. Since the non-resident entity in question had no PE in India, the provisions of section 40(a)(ia) regarding TDS deduction were deemed inapplicable. The Tribunal upheld the decision of the CIT (A) in this regard, stating that there was no illegality or perversity in the impugned order. Consequently, the appeal filed by the Revenue was dismissed based on the DTAA provisions and the absence of a PE in India for the non-resident entity.

In conclusion, the Tribunal's judgment addressed the issues of TDS deduction on foreign commission, interpretation of business connection under the Income Tax Act, and the applicability of DTAA provisions, providing a detailed analysis and legal reasoning for dismissing the Revenue's appeal.