2015 (8) TMI 1456 - AT - Income Tax

TDS u/s 195 - non-deduction of tax on commission paid to non-resident outside India - addition u/s 40(a)(i) - income accrued in India - PE in India - Held that - AO has accepted that the payment made by the assessee is on account of commission and compensation to the foreign agent and therefore it is not the case of the AO that the payment in question is either fee for technical service or royalty which could be taxed in India as per provisions of sec.9(1) of the Act. We further note that the AO has supported his finding by citing the reason that commission income arises in India because right to receive commission arises when the order is executed by the assessee in India. In our view, this logic and contention of the AO is absolutely erroneous and based on mis-interpretation of the term accrue or arise in India as per the provisions of sec.9(1). The commission is paid to foreign agent for services rendered by the agent outside India and the agent has no business link or source of income in India. Therefore, in absence of any business connection or source of income and consequently any permanent establishment in India, the said income in the hands of the foreign agent is not taxable in India. - decided in favour of assessee. Disallowance of compensation paid of prior period export sales - selection of assessment year - Held that - There is no dispute that the assessee is following mercantile system of accounting. Even otherwise, as per the accounting standard as well as per provisions of Companies Act, the assessee is bound to follow the mercantile system of accounting. The assessee has claimed sale rebate/damage on account of defective goods exported in the earlier year. It is pertinent to note that it is not the claim of the assessee that the liability of damage has been crystallized in this year and till the year under consideration assessee was disputing the claim of the purchaser. It is only payment in respect of same amount was adjusted against the purchases received in the year under consideration. Therefore, this amount of damage is undisputedly related to the export of goods made in the earlier assessment year. Accordingly, when the assessee has never disputed the claim of damages, then the claim which pertains to earlier year cannot be allowed in the year under consideration. - decided against assessee.

Summary

Issues Involved:
1. Deletion of disallowance under Section 40(a)(i) of the Income Tax Act, 1961 for non-deduction of tax on commission paid to non-resident.
2. Allowability of prior period expenses as business expenditure.

Issue-wise Detailed Analysis:

1. Deletion of disallowance under Section 40(a)(i) of the Income Tax Act, 1961 for non-deduction of tax on commission paid to non-resident:

The primary issue for consideration was whether the CIT(A) was justified in deleting the disallowance of Rs. 85,21,138/- made by the AO under Section 40(a)(i) due to non-deduction of tax on commission paid to a non-resident outside India. The AO had disallowed the commission expenses on the grounds that the assessee did not deduct tax at source, arguing that the income accrued to the foreign agent through business connections in India, thereby making it taxable in India. The CIT(A) overturned this disallowance, holding that the commission income paid to the foreign agent was not chargeable to tax in India, and thus, no tax deduction at source was necessary under Section 195.

Upon appeal, the Tribunal considered the submissions from both sides. The Tribunal noted that the AO's logic was flawed and based on a misinterpretation of the term "accrue or arise in India" as per Section 9(1) of the Act. The Tribunal found that the commission was paid for services rendered outside India, and the foreign agent had no business link or source of income in India. Therefore, in the absence of a business connection or permanent establishment in India, the income was not taxable in India. The Tribunal relied on a previous decision in ACIT vs. Vilas N Tamhankar, which clarified that payments for services rendered outside India, without a business connection in India, are not chargeable to tax in India. Consequently, the Tribunal upheld the CIT(A)'s order and dismissed the revenue's appeal.

2. Allowability of prior period expenses as business expenditure:

The second issue pertained to the disallowance of Rs. 10,88,152/- claimed by the assessee as compensation for damages to goods exported in a prior period. The AO disallowed this claim on the grounds that the assessee followed the mercantile system of accounting, and such expenses should be accounted for in the year they were incurred. The CIT(A) upheld this disallowance, stating that sale rebates, discounts, and compensation for damages relate to the year of sale and not to subsequent years.

The Tribunal reviewed the matter and noted that the assessee did not dispute the claim of damages in the earlier year and had adjusted the payment in the current year. Since the liability for damages was not contested and pertained to the previous year's exports, the Tribunal held that the claim could not be allowed in the current year. Therefore, the Tribunal found no error in the orders of the authorities below and dismissed the cross objections of the assessee.

Conclusion:
The Tribunal dismissed both the revenue's appeal and the assessee's cross objections, upholding the CIT(A)'s decisions on both issues. The commission paid to the foreign agent was not taxable in India, and prior period expenses could not be claimed in the current year under the mercantile system of accounting.