2015 (7) TMI 1402 - AT - Income Tax

TDS u/s 195 - Disallowance made u/s.40(a)(i) - liable for TDS as the services were rendered outside India - HELD THAT - Section 195 (1) of the Act also prescribes that tax has to be deducted while making payment to non-resident which is chargeable under the provisions of the Act. Therefore the condition precedent for deduction of tax is the income must be chargeable under the provisions of the Act. In the facts of the present case the agreement entered into by the assessee with foreign agents revealed that they have been appointed to act as Commission agents outside India in their respective countries. AO has disallowed commission payment u/s 40(a)(i) since there was no TDS made on this payment. As is evident from the assessment order excepting this inference by the AO there is nothing on record to suggest that the income is chargeable to tax in India or the payment has been received by the non-resident agents in India or by any other person on their behalf. There is also no finding by the AO that the non-resident agents have a permanent establishment in India or have any business connection in India by virtue of which the payment of commission would have accrued or arose in India. The facts available on record clearly suggest that the non-resident agents did not carry out any business operations in India and has acted as selling agents of the assessee outside India. Therefore the commission earned by them for services rendered by them outside India cannot be considered as income chargeable to tax in India. AO has not established the fact on record that any one of the non-resident agents is carrying on business through a permanent establishments. Therefore when the commission paid to the non-residents are not chargeable to tax under the provisions of the Act no deduction of tax is required to be made u/s 195(1) of the Act. In the present case the AO has failed to bring any material on record on the basis of which it could be concluded that commission paid to foreign agents is chargeable to tax in India. Unless the income is chargeable to tax in India then tax is not required to be deducted u/s 195(1). From the facts and materials available on record no definite conclusion can be made that the commission paid to foreign agents is chargeable to tax in India. In the present case the foreign concern was acting as the selling agent for the assessee and no services rendered by it within the taxable territory the amount payable as commission was not liable to tax and as the income is arising or accruing to a foreign concern in India there is no disallowance u/s. 40(a)(i) of the Act on the ground that the tax is not deducted at source u/s. 195 of the Act or remittances made to a foreign concern. In view of this we find no merit in the ground taken by the Revenue.- Decided against revenue.

Summary

Issues:
1. Disallowance u/s.40(a)(i) of the I.T. Act, 1961 for non-deduction of TDS on commission payments made to non-residents.

Analysis:

Issue 1: Disallowance u/s.40(a)(i) of the I.T. Act

The Revenue appealed against the deletion of the addition towards disallowance u/s.40(a)(i) by the Commissioner of Income-tax(Appeals). The Revenue argued that the commission received by the non-resident agent had a business connection in India, making the income taxable in India, thus requiring TDS deduction. Conversely, the Respondent contended that the services were rendered outside India, and the recipient had no business connection in India, making the payment not taxable in India. The Respondent relied on legal precedents to support their argument that the commission paid to non-resident agents did not fall under the definition of "fees for technical services" and was not liable for TDS deduction. The Respondent emphasized that TDS deduction is only required when the income of the agent is chargeable to tax under the Act. The Tribunal noted that the agreement with foreign agents specified their role as commission agents outside India, and there was no evidence to suggest the income was chargeable to tax in India. The Tribunal concluded that since the commission earned by the non-resident agents for services rendered outside India was not chargeable to tax in India, no TDS deduction was necessary. The Tribunal dismissed the Revenue's appeal, upholding the deletion of the disallowance u/s.40(a)(i) by the Commissioner of Income-tax(Appeals).

This detailed analysis of the judgment covers the issues involved comprehensively, providing a thorough understanding of the legal reasoning and decisions made by the Tribunal in the case.