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2018 (5) TMI 2086 - AT - Income TaxTDS u/s 195 - tax withholding liability - vicarious liability - payments made to non-residents - non deduction of taxes at source on payments for commission of sales exports arid legal and professional charges - income as accrued in-India - HELD THAT - As in case of Farida Leather Company 2016 (2) TMI 798 - MADRAS HIGH COURT wherein it was held that Merely because a person has not deducted tax at source or a remittance abroad, it cannot be inferred that the person making the remittance, has committed a default in discharging his tax withholding obligations because such obligations come into existence only when the recipient has a tax liability in India. The tax withholding liability of the payer is inherently a vicarious liability on behalf of the recipient and therefore, when the recipient / foreign agent do not have the primary liability to be taxed in respect of income embedded in the receipt, the vicarious liability of the payer to deduct tax does not arise. This vicarious tax withholding liability cannot be invoked, unless primary tax liability of the recipient / foreign agent is established. In this case, the primary tax liability of the foreign agent is not established. Therefore, the vicarious liability on the part of the assessee to deduct the tax at source does not exist. In the instant case, it is seen, admittedly that the nonresident agents were only procuring orders abroad and following up payments with buyers. No other services were rendered other than the above. Sourcing orders abroad, for which payments have been made directly to the non-residents abroad, does not involve any technical knowledge or assistance in technical operations or other support in respect of any other technical matters. It also does not require any contribution of technical knowledge, experience, expertise, skill or technical know-how of the processes involved or consists in the development and transfer of a technical plan or design. The parties merely source the prospective buyers for effecting sales by the assessee. When the transaction does not attract the provisions of Section 9 of the Act, the Revenue has no case and the appeal is liable to be dismissed - Decided in favour of assessee. Commission on sales has been paid to one M/s Excel Enterprises, Ludhiana are operating from India. Hence, the addition made by the Assessing Officer under section 40(a)(ia) to that extent stands confirmed.
Issues Involved:
1. Whether the Ld. CIT(A) erred in allowing the appeal of the assessee without appreciating the facts of the case. 2. Whether the Ld. CIT(A) erred in deleting the addition made under section 40(a)(ia) on account of non-deduction of taxes at source on payments for commission of sales exports and legal and professional charges. Issue-wise Analysis: 1. Whether the Ld. CIT(A) erred in allowing the appeal of the assessee without appreciating the facts of the case: The Revenue contended that the Ld. CIT(A) allowed the appeal of the assessee without properly appreciating the facts. The Assessing Officer had disallowed amounts under section 40(a)(ia) due to the assessee's failure to deduct TDS on sales commission paid to foreign parties. The Assessing Officer argued that TDS was required even though the commission agents operated outside India and did not have any Permanent Establishment (PE) in India, as the services were rendered for an Indian company. 2. Whether the Ld. CIT(A) erred in deleting the addition made under section 40(a)(ia) on account of non-deduction of taxes at source on payments for commission of sales exports and legal and professional charges: The appellant company made payments for services rendered outside India to parties who were also outside India. The Ld. CIT(A) noted that the provisions of Section 195 of the Income Tax Act, 1961, which deals with the deduction of tax at source, should be read in conjunction with Section 9, which deals with income deemed to accrue or arise in India. The Ld. CIT(A) highlighted that the parties to whom payments were made had no PE in India, and the Circulars of CBDT and Double Taxation Avoidance Agreement (DTAA) were not properly considered by the Assessing Officer. Provisions as per Income Tax Act: a. Section 195: It mandates that tax must be deducted at source on payments to non-residents if the sum is chargeable under the Income Tax Act. b. Section 9: It specifies that certain incomes are deemed to accrue or arise in India even if they actually accrue or arise outside India. This includes income from business connections in India. The Ld. CIT(A) referenced various CBDT Circulars (No. 23 of 1969, No. 163 of 1975, and No. 786 of 2000) which clarified that commission paid to foreign agents operating outside India is not taxable in India if they do not have a PE in India. Although these circulars were withdrawn in 2009, the Ld. CIT(A) emphasized that the withdrawal did not change the legal position that no TDS was required on such payments. Case Law References: The Ld. CIT(A) cited the case of M/s IDS Infotech Ltd. vs. DCIT, where it was held that if services rendered by non-residents are not in the nature of technical services, no income is deemed to have accrued to the non-resident entities in India, and thus, no TDS is required. Hon'ble Supreme Court Judgment in GE India Technology Centre (P.) Ltd. v. CIT: The Supreme Court held that Section 195(1) uses the expression "sum chargeable under the provisions of the Act," meaning that TDS is required only if the payment includes an element of income chargeable to tax under the Act. If the sum paid is not chargeable to tax, no TDS is required. Analysis of Facts: The Ld. CIT(A) found that the non-resident agents were operating outside India, the commission paid was for services provided outside India, the agents did not have any PE in India, and the amounts were remitted directly outside India. The Ld. CIT(A) concluded that since there was no income chargeable to tax in India for the foreign agents, the provisions of Section 40(a)(ia) were not applicable. Decision: The appeal of the Revenue was dismissed, confirming that no TDS was required on the commission payments made to foreign agents operating outside India. However, the addition made by the Assessing Officer under section 40(a)(ia) was confirmed for certain parties operating from India. Conclusion: The judgment emphasized that TDS obligations arise only if the payment is chargeable to tax under the Income Tax Act. Payments to non-resident agents for services rendered outside India, where the agents do not have a PE in India, are not chargeable to tax in India, and thus, no TDS is required. The decision reinforced the importance of considering the legal provisions and CBDT Circulars in determining TDS obligations.
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