2018 (5) TMI 1840 - AT - Income Tax

TDS u/s 195 - Disallowance u/s. 40(a)(i) - commission paid to foreign agents - payment of fees for technical services - nature of the payment made by the assessee to non-resident agents - income accrued in India - whether the commission/brokerage paid to foreign agents are chargeable to tax in India, thereby requiring the assessee to deduct tax at source on such payment? - application of source rule - HELD THAT - AO himself at more than one place in the assessment order has recorded a finding of fact that the assessee has paid commission to foreign agents for booking/obtaining export orders - very much clear that the payment by the assessee is simply and purely in the nature of commission/brokerage for procuring export orders. Section 9(1)(vii) speaks of payment of fees for technical services. Applying the decision of GVK Industries (2011 (3) TMI 1 - SUPREME COURT OF INDIA), the payment made by the assessee to foreign agents under no circumstances can be brought within the term fees for technical services as prescribed u/s. 9(1)(vii) - while examining identical nature of payment made by the assessee in assessment year 2010-11 as categorically held that the commission/brokerage paid to non-resident agents cannot be termed as fees for technical services. That being the case, the reasoning of the Assessing Officer that the provisions of section 9(1)(vii) of the Act is applicable to the commission paid, is unacceptable. Source rule applies to the payment made by the assessee Assessing Officer s own admission, the main business of the assessee is export of cotton yarn and the disputed payment is in the nature of commission paid to foreign agents for procuring orders in their respective countries of residences. That being the case, the payment is not in the nature of fee for technical services. the commission paid to non-resident agents are not chargeable to tax in India either u/s. 9(1)(i) or under any other provisions of the Act since the non residents have no business connection in India or permanent establishment in India. That being the case, there was no liability on the assessee to deduct tax at source while paying commission to the non resident agent. The provisions of section 9(2) of the Act are not applicable, as the payment made by the assessee are not of the nature as provided under clauses (v), (vi) and (vii) of section 9 of the Act. payment made to non-resident for services rendered outside India, is not chargeable to tax in India. Hence, the assessee was not liable to deduct tax at source on such payment. - Decided in favour of assessee.

Summary

Issues Involved:
1. Deletion of disallowance made under Section 40(a)(i) of the Income Tax Act, 1961 by the Assessing Officer on account of commission paid to foreign agents.

Issue-wise Detailed Analysis:

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

The solitary issue arising for consideration in the present appeal relates to the deletion of disallowance made u/s. 40(a)(i) of the Income Tax Act, 1961 by the Assessing Officer on account of commission paid to foreign agents.

Briefly the facts are that the assessee, an Indian company, is a Government of India recognized Star Export House engaged in exporting cotton yarn. For the assessment year under dispute, the assessee filed its return of income declaring a total income of ? 21,03,080/-. During the assessment proceedings, the Assessing Officer found that the assessee claimed a deduction of ? 1,36,71,242.13 on account of commission paid to foreign agents for booking export orders. The Assessing Officer was of the view that the assessee was required to deduct tax at source u/s. 195 of the Act while paying commission to the foreign agents. Since the assessee failed to do so, the Assessing Officer proposed to disallow the deduction claimed.

In response, the assessee contended that the commission was paid to foreign agents for services rendered outside India, and these agents had no permanent establishment or business connection in India. Therefore, such payments could not be considered as income chargeable to tax in India, making the provisions of section 195 inapplicable. Despite these submissions, the Assessing Officer disallowed the deduction, relying on the Supreme Court ruling in GVK Industries vs. ITO 332 ITR 130 (SC), which held that commission paid to foreign agents for obtaining export orders is taxable in India. Consequently, the assessee was liable to deduct tax at source under section 9(1)(i)/9(1)(vii) r.w.s. 195. The Assessing Officer also noted that similar disallowances in the assessee's case for previous years were deleted by the Tribunal, but he chose not to follow the Tribunal's decision as the department had appealed to the High Court.

The assessee appealed against the disallowance to the Commissioner of Income Tax (Appeals), who noted that the Tribunal had deleted similar disallowances in the assessee's case for previous years and followed the same reasoning to delete the addition for the impugned assessment year.

The Departmental Representative argued that the payments to foreign agents, although for procuring orders outside India, were taxable in India as the work was executed in India, relying on the Supreme Court decision in GVK Industries. He contended that the source rule applied, making the payments taxable in India under section 9(1)(vii)(b) and the Explanation to section 9(2).

The Authorized Representative for the assessee argued that the payments were made to agents located outside India who rendered services in their respective countries, having no business connection or permanent establishment in India. He emphasized that under section 195, tax is required to be deducted at source only if the payment is chargeable to tax in India, which was not the case here. He also pointed out that the Tribunal had consistently deleted similar disallowances in the assessee's case for previous years.

Upon careful consideration, the Tribunal noted that the Assessing Officer accepted that the commission was paid to foreign agents for booking export orders. The Tribunal referred to section 5, which defines the scope of total income, and section 9, which deals with income deemed to accrue or arise in India. It highlighted that the non-resident agents did not have any business connection in India as defined under Explanation 2 to section 9(1)(i), and the payments were not chargeable to tax in India. The Tribunal also noted that the Assessing Officer's reliance on the Supreme Court decision in GVK Industries was misplaced as the facts of the present case were different. In GVK Industries, the payment was for technical services, whereas in the present case, it was purely for commission/brokerage for procuring export orders.

The Tribunal concluded that the provisions of section 195 were not applicable as the commission paid to non-resident agents was not chargeable to tax in India. The Tribunal upheld the Commissioner of Income Tax (Appeals)'s order and dismissed the department's appeal.

Before parting, the Tribunal observed that other decisions referred to by the Assessing Officer were not applicable to the present case and thus did not discuss them in detail.

In the result, the Revenue's appeal was dismissed.

Order pronounced in the open court on 11.05.2018