2014 (1) TMI 1863 - AT - Income Tax

TDS u/s 195 - commission paid by the assessee to non-residents - Addition u/s 40(a)(i) - HELD THAT - We have heard the arguments of both the parties and perused the record as well as gone through the orders of the authorities below. We find the similar issue came up before the Tribunal in assessee s own case for AY 2006-07 2011 (8) TMI 1319 - ITAT HYDERABAD commission payments and consequently the expenditure on export commission payable to non resident for services rendered outside India becomes allowable expenditure and the same is outside rigors of section 40(a)(ia). In the instant case CIT(A) observed that the AO had not been able to establish that there was specific intention of the payee to receive the payment within the territory of India therefore the CIT(A) rightly did not agree with the view taken by the AO with regard to the addition made on this issue and the CIT(A) was justified in directing the assessing officer to delete the said addition. CIT(A) on this issue was not to be interfered with and accordingly the same was to be upheld. - Decided in favour of the assessee Also in AY 2008-09 when the revenue came in appeal to Tribunal on similar grounds in assessee s own case the coordinate bench dismissed the appeal of the revenue following its decision in the case of M/S. DIVI S LABORATORIES LTD. HYDERABAD. 2011 (3) TMI 1628 - ITAT HYDERABAD

Summary

Issues:
1. Applicability of section 195 for payments of commission.
2. Applicability of section 40(a)(i) for commission paid to non-residents.
3. Determination of whether payments relate to services utilized in India.

Analysis:
1. The appeal was filed by the Revenue against the CIT(A)'s order for the assessment year 2009-10, questioning the applicability of section 195 for commission payments. The Assessing Officer disallowed commission payment under section 40(a)(i). However, the CIT(A) deleted the additions based on previous rulings in the assessee's favor for AY 2006-07. The Tribunal upheld the CIT(A)'s decision, emphasizing that unless the income is taxable in India, there is no obligation to deduct tax under section 195. The Tribunal referred to Circular No.7, dated 22.10.2009, highlighting that commission to non-resident entities not liable to tax in India is not subject to TDS. The Tribunal concluded that the commission payments to non-residents for services outside India are not within the scope of section 40(a)(ia).

2. The Tribunal reiterated its stance from previous cases, including AY 2008-09, where similar issues were decided in favor of the assessee. The Tribunal emphasized that the payee's specific intention to receive payment in India must be established for tax deduction under section 195. In the absence of such intent, the Tribunal upheld the CIT(A)'s decision to delete the addition made by the Assessing Officer. The Tribunal highlighted that the payment remitted directly to non-resident agents outside India does not attract TDS obligations in India. Therefore, the Tribunal dismissed the Revenue's appeal, aligning with its previous decisions and affirming the CIT(A)'s order.

3. The Tribunal's consistent interpretation of section 195 and section 40(a)(ia) in cases involving commission payments to non-residents for services rendered outside India establishes a precedent. The Tribunal's reliance on Circulars and legal provisions underscores the importance of establishing the tax liability in India for determining TDS obligations. The Tribunal's detailed analysis of the payee's location and income source reinforces the principle that income not accruing in India is not subject to TDS under section 195. The Tribunal's decision serves as a guideline for future cases involving similar issues, emphasizing the need for a clear nexus between the income source and India for tax implications to apply.

This judgment provides clarity on the interpretation of tax provisions concerning commission payments to non-residents and sets a precedent for cases involving similar issues, ensuring consistency in applying tax laws and regulations.