2021 (6) TMI 1081 - HC - Income Tax

TDS u/s 195 - disallowance u/s 40(a)(ia) on commission payments made to non residents agents - whether said services are not in the nature of technical services and does not come under purview of section 9(2) of the Act ? - HELD THAT - As decided in M/S. PUMA SPORTS INDIA P., LTD., 2021 (4) TMI 93 - KARNATAKA HIGH COURT this Court is of the considered opinion that in the present case the Associated Enterprises has rendered services out of India in the form of placing orders with the manufacturers who are already outside India. The commission was paid to Associate Enterprises out of India. No taxing event has taken place within the territories of India and therefore, the Tribunal was justified in allowing the appeal of the assessee.

Summary

Issues Involved:
1. Disallowance under Section 40(a)(ia) of the Income Tax Act on commission payments to non-resident agents.
2. Determination of whether services rendered by non-resident agents qualify as technical services under Section 9(1)(vii) of the Income Tax Act.
3. Applicability of TDS on commission payments to non-resident agents.

Issue-wise Detailed Analysis:

1. Disallowance under Section 40(a)(ia) of the Income Tax Act on commission payments to non-resident agents:

The core issue was whether the Tribunal was correct in setting aside the disallowance made under Section 40(a)(ia) of the Act on commission payments to non-resident agents. The Tribunal held that the services provided by non-resident agents did not qualify as technical services under Section 9(1)(vii) of the Act, and thus, the commission payments were not subject to TDS.

2. Determination of whether services rendered by non-resident agents qualify as technical services under Section 9(1)(vii) of the Income Tax Act:

The Tribunal's decision was supported by the fact that the non-resident agents rendered services outside India, and the commission was paid outside India. The services provided by these agents were in the form of placing orders with manufacturers, which did not qualify as technical services under Section 9(1)(vii). The Tribunal relied on precedents, including the Supreme Court's judgment in GVK Industries Ltd., which clarified that for income to be taxable under Section 9(1)(vii), the services must be utilized in India.

3. Applicability of TDS on commission payments to non-resident agents:

The Tribunal concluded that since the services were rendered and the commission was paid outside India, there was no requirement for TDS deduction under Section 195 of the Act. This conclusion was based on the principle that income accruing or arising outside India through business connections cannot be deemed to accrue or arise in India if no business operations are carried out within India. The Tribunal's decision was further reinforced by the Supreme Court's judgment in Toshoku Ltd., which held that commission earned by non-resident agents for services rendered outside India cannot be deemed to be income accrued or arisen in India.

Conclusion:

The High Court upheld the Tribunal's decision, affirming that the commission payments to non-resident agents were not subject to TDS as the services were rendered and the commission was paid outside India. The substantial question of law was answered in favor of the assessee, and the appeal was dismissed. The Court emphasized that no taxing event occurred within the territories of India, and thus, the Tribunal was justified in allowing the appeal of the assessee. The judgment reiterated the importance of determining the situs of services rendered and the location of payment in deciding the applicability of TDS on commission payments to non-resident agents.