2019 (6) TMI 1649 - AT - Income Tax

TDS u/s 195 - Disallowance u/s. 40(a)(i) and 40(a)(ia) in respect of payment being commission on export sales - HELD THAT - As decided in own case on applicability of Expin-2 to Sec.195(1) of the Act which was introduced by the finance Act 2012 w e f 1- 4 -1962 we are of the view. That the said explanation is applicable only when there is accrual of income in India. When the conclusion reached is that there is no accrual of income in India, we fail to see how Expin,2 to Sec. 195 are attracted.There was no obligation on the part of the Assessee to deduct tax at source while making payment to the non-resident, Consequently, no disallowance of commission expenses paid to non-resident could be made invoking the provisions of sec. 40a)(1) of the Act. We hold accordingly and direct the AO to delete the disallowance so made - Decided against revenue.

Summary

Issues Involved:
1. Whether CIT(A) erred in deleting the disallowance made u/s. 40(a)(i) and 40(a)(ia) in respect of payment of ?2,60,48,963/- being commission on export sales.
2. Any other ground to be adduced at the time of hearing.

Issue-Wise Detailed Analysis:

1. Disallowance under Section 40(a)(i) and 40(a)(ia) for Non-Deduction of TDS on Export Commission:

The Assessee filed its return of income for the year under consideration declaring Nil income, which was subsequently revised. The return was processed under section 143(1) of the Act, and the case was selected for scrutiny. The Ld. AO observed that the Assessee, engaged in the manufacture and export of cotton yarn/knitted fibers, had debited a sum of ?2,60,48,963/- towards commission on export sales without deducting TDS under section 195(1). Consequently, the Ld. AO disallowed the expense under section 40(a)(ia) of the Act.

Aggrieved by the addition, the Assessee appealed before the Ld. CIT(A), who allowed the claim by following the order passed by her predecessor in the Assessee’s own case for the assessment year 2010-11. The Revenue, dissatisfied with the Ld. CIT(A)'s order, appealed before the Tribunal.

The Tribunal noted that the issue was covered in favor of the Assessee by its own decision for the assessment year 2010-11. The Tribunal reiterated that the payments were made to non-resident marketing agents for services rendered outside India. These agents had no permanent establishment (PE) in India, and the payments were not considered as 'royalty' or 'fees for technical services' (FTS) under Section 9(1)(vi) and 9(1)(vii) of the Act. Therefore, the income was not chargeable to tax in India, and no TDS was required under Section 195.

The Tribunal further referenced the decision in the case of Divi's Laboratories Ltd., where it was held that no tax is deductible under Section 195 on commission payments to non-residents for services rendered outside India. The Tribunal also cited the Supreme Court's judgment in GE India Technology Centre (P) Ltd. vs. CIT, which clarified that tax deduction at source applies only to sums chargeable to tax under the IT Act.

The Tribunal concluded that the CIT(A) was justified in allowing the Assessee's claim, as the payment in question was not chargeable to tax in India. The Revenue's reliance on the Explanation 2 to Section 195(1) was dismissed, as it did not override the prerequisite that the sum must be chargeable under the provisions of the Act.

2. Any Other Ground to be Adduced at the Time of Hearing:

No additional grounds were raised during the hearing.

Conclusion:

The Tribunal upheld the CIT(A)'s decision, dismissing the Revenue's appeal. It reaffirmed that the commission payments to non-resident agents for services rendered outside India were not subject to TDS under Section 195, and therefore, the disallowance under Section 40(a)(ia) was not warranted. The appeal filed by the Revenue was dismissed, and the order was pronounced in the open court on 07th June 2019.