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2018 (7) TMI 1959 - AT - Income TaxTDS u/s 195 - Disallowance u/s. 40(a)(i) - TDS was not made on the commission paid to foreign entity for the services rendered abroad - DTAA between India and USA - HELD THAT - Provisions of Section 195 would not be applicable to the commission payments made by assessee to non-resident agent who has not done any service in India and as such income is not chargeable to tax under the provisions of the Act as there is no requirement to do any TDS u/s. 195, the disallowance made u/s. 40(a)(i) is also not survive. CIT(A) without understanding the international law has simply held that a foreign agent and the Indian company are sister concerns and accordingly the amounts are taxable. Even if one were to consider that other company is a sister concern of assessee, how the provisions of Section 195 or Section 5 and Section 9 are applicable has not been discussed by CIT(A) at all. The provisions of DTAA between India and USA also gives the right to tax the amount in the hands of foreign assessee if the same is considered as business income when there is no permanent establishment in India. Since the non- resident has no permanent establishment in India, the question of taxing the amount does not arise as the provisions of DTAA which over rides the provisions of Income Tax Act. In view of that, the order of CIT(A) cannot be upheld. Similar view was also expressed by the Co-ordinate Bench in the case of Dy.CIT Vs. M/s. Linkwell Telesystems (P.) Ltd. 2014 (1) TMI 1863 - ITAT HYDERABAD wherein also commission was paid to non-residents for the services rendered abroad and was held not taxable. In view of that, we cannot uphold the orders of AO disallowing the amount u/s. 40(a)(i). - Decided in favour of assessee.
Issues Involved:
1. Disallowance under Section 40(a)(i) of the Income Tax Act due to non-deduction of TDS on commission paid to a foreign entity. 2. Determination of whether the commission paid to a foreign agent for services rendered outside India is taxable in India. 3. Applicability of Double Taxation Avoidance Agreement (DTAA) between India and the USA. Detailed Analysis: 1. Disallowance under Section 40(a)(i) of the Income Tax Act: The primary issue in the appeal is the disallowance made under Section 40(a)(i) of the Income Tax Act on the grounds that the assessee did not deduct TDS on the commission paid to a foreign entity for services rendered outside India. The Assessing Officer (AO) relied on the provisions of Section 9(1)(i) of the Act, which states that income accruing or arising directly or indirectly through any business connection in India shall be deemed to accrue or arise in India. The AO also referred to the decision of the Authority for Advance Ruling (AAR) in the case of SKF Boilers and Driers (P.) Ltd., concluding that the commission paid to the foreign agent is deemed to accrue or arise in India, thus making the provisions of Section 195 applicable. Consequently, the AO disallowed the commission payment under Section 40(a)(i) due to the failure to deduct tax. 2. Determination of Taxability of Commission Paid to Foreign Agent: The assessee argued that the commission was paid to a foreign agent for services rendered entirely outside India and that the agent had no permanent establishment in India. Citing Section 9 and the DTAA between India and the USA, the assessee contended that the commission paid was not taxable in India, and hence, there was no requirement to deduct TDS. The Commissioner of Income Tax (Appeals) [CIT(A)], however, took a different stand, stating that the foreign entity was not a separate entity but a subsidiary of the appellant company, thus making the commission payment liable for TDS under Section 195. The Tribunal examined the facts and found no dispute that the services were rendered outside India and the foreign entity had no permanent establishment in India. The Tribunal referred to several judicial precedents, including the decision of the Hon'ble Jurisdictional High Court in CIT Vs. Sri Aurobindo Impex Company, which held that income does not accrue or arise in India if the services are rendered outside India. The Tribunal also referred to the Supreme Court's decision in CIT Vs. Toshoku Ltd., which established that entries in the books of account do not constitute actual or constructive receipt by the non-resident sales agents. 3. Applicability of DTAA Between India and USA: The Tribunal highlighted that the provisions of the DTAA between India and the USA override the provisions of the Income Tax Act. Since the non-resident agent had no permanent establishment in India, the commission paid could not be taxed in India. The Tribunal also noted that the CIT(A) failed to discuss how the provisions of Section 195, Section 5, and Section 9 were applicable in this context. The Tribunal emphasized that the DTAA provisions give the right to tax the amount in the hands of the foreign assessee only if there is a permanent establishment in India, which was not the case here. Conclusion: The Tribunal concluded that the provisions of Section 195 were not applicable to the commission payments made to the non-resident agent, as the services were rendered outside India and the income was not chargeable to tax under the Income Tax Act. Consequently, the disallowance made under Section 40(a)(i) was not justified. The appeal of the assessee was allowed, and the order of the CIT(A) was set aside. Order: The appeal of the assessee is allowed. Order pronounced in the open court on 20th July, 2018.
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