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2019 (5) TMI 1679 - AT - Income TaxTDS u/s 195 - disallowance of commission paid to non residents U/s 40(a)(ia) - income accrued in India - HELD THAT - Once the payment in question is commission then the provisions of Section 40 (a)(i) of the Act are applicable only if such sum is chargeable to tax under this Act. As per provisions of Section 5(2) of the Act the total income of non-resident includes all income from whatsoever sources derived which is received or deemed to be received in India accrues or arises or is deemed to accrue or arise to him in India during such year Commission paid to non-resident outside India for the services rendered outside India will not fall in the category of the income received for deemed or received in India as well as accrues or arises or is deemed to accrue or arise in India. Thus the said amount paid to non-resident does not fall in the scope of total income of non- resident and consequently it is not chargeable to tax in India under the provisions of the Act. The said income in the hands of non-resident has to be considered in the light of the provisions of DTAA between India and the Country of the non-resident. In the absence of P.E. of the non-resident in India such business income is not chargeable to tax in India. Accordingly in the facts and circumstances of the case when the amount paid by the assessee is not chargeable to tax in India then the assessee is not liable to deduct TDS and consequently the provisions of Section 40(a)(i) of the Act cannot be invoked for making the disallowance. In the facts and circumstances of the case the disallowance made by the AO U/s 40(a)(i) of the Act is deleted. - Decided in favour of assessee
Issues Involved:
1. Disallowance of commission paid to non-residents under Section 40(a)(i) due to non-deduction of TDS. Issue-wise Detailed Analysis: 1. Disallowance of Commission Paid to Non-Residents Under Section 40(a)(i) Due to Non-Deduction of TDS: The assessee, a partnership firm engaged in manufacturing PP Bags, paid a commission of ?38,92,787 to various non-resident entities without deducting TDS. The Assessing Officer (AO) invoked Section 40(a)(i) read with Section 195 of the Income Tax Act, disallowing the commission on the grounds that tax was not deducted at source. The AO referred to Explanation II of Section 195(1) inserted by the Finance Act, 2012, asserting that the provisions apply regardless of whether the non-resident has a business connection in India. The AO further classified the payment as Fee for Technical Services (FTS) under Section 9(1)(vii), stating that the services rendered were managerial or consultancy in nature. The assessee contended that the commission paid was for services rendered outside India, and thus, not liable to tax in India. Consequently, there was no obligation to deduct TDS. The assessee cited several judicial precedents supporting their claim, including decisions from the Delhi High Court and Mumbai Benches of the Tribunal. The CIT(A) upheld the AO's decision, emphasizing that there was no ruling from the Authority for Advance Ruling (AAR) confirming that the commission was not chargeable to tax in India. The CIT(A) concluded that the assessee was required to deduct tax at source as per Explanation II of Section 195(1), regardless of the non-resident’s business presence in India. Upon appeal, the Tribunal considered the rival submissions and relevant material. It noted that the AO had not provided a detailed examination or finding on how the payment qualified as FTS. The Tribunal emphasized that Section 40(a)(i) applies only if the sum paid to the non-resident is chargeable to tax under the Act. According to Section 5(2), income received or deemed to be received in India, or accruing or arising in India, is taxable. The commission paid for services rendered outside India does not fall within this category and thus, is not chargeable to tax in India. The Tribunal also considered the provisions of the Double Taxation Avoidance Agreement (DTAA), noting that in the absence of a Permanent Establishment (P.E.) of the non-resident in India, the business income is not taxable in India. The Tribunal concluded that since the commission paid to non-residents was not chargeable to tax in India, the assessee was not liable to deduct TDS. Consequently, the provisions of Section 40(a)(i) could not be invoked to disallow the commission. The Tribunal deleted the disallowance made by the AO, allowing the appeal filed by the assessee. Conclusion: The Tribunal allowed the appeal, ruling that the commission paid to non-residents for services rendered outside India was not chargeable to tax in India. Therefore, the assessee was not obligated to deduct TDS, and the disallowance under Section 40(a)(i) was deleted.
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