2017 (5) TMI 368 - HC - Income Tax

Non-compliance of the provisions of section 40(a)(i) - commission payments received by the Indian agent on behalf of the Hong Kong entity in India - Non deduction of TDS - Held that - An agreement had been entered into by the appellant with M/s.Textile Services Limited, Hong Kong for canvassing of export orders. Commission was paid on various dates between 2.7.2001 to 25.1.2002 amounting to ₹ 17,84,293/-. The amount was paid to M/s Textile Services Limited, an agent of the foreign entity based in Delhi. Concurrent orders of the authorities confirm the position that the commission has actually been received in India and no details were forthcoming to establish that the Indian entity received the same for onward transmission to Hong Kong. The inevitable conclusion in law is that the commission payments are liable to tax in India. The liability to deduction of tax at source is in terms of section 40(a)(i) of the Act. The argument of the learned counsel as well as the substantial question of law sought to be raised appear to be a clever afterthought, particularly since this argument was not raised either at time of assessment or first appeal but for the first time before the Tribunal even though all earlier orders were passed after the insertion of sub clause (ia) of section 40. Thus the commission payments have been received by the Indian agent on behalf of the Hong Kong entity in India, we find no infirmity in the order of the lower authorities and answer the substantial question of law against the appellant and in favour of the Revenue.

Issues involved:
1. Tax deduction on commission payments made to entities for procurement of export orders.
2. Disallowance of commission payment to an Indian entity.
3. Applicability of Circular No.786 dated 7.2.2000.
4. Interpretation of section 40(a)(i) of the Income Tax Act.
5. Liability for tax deduction on commission payments received by an Indian agent on behalf of a foreign entity.

Detailed Analysis:
1. The appellant, engaged in garment exports, paid commissions to various entities for export orders. The assessing officer disallowed the commission paid to an Indian entity, Textile Services Limited, Delhi, for non-compliance with section 40(a)(i) of the Income Tax Act. The appellant contended that since most payments were made to entities outside India, no tax liability existed. The Commissioner of Income Tax (Appeals) confirmed the disallowance, stating that the transaction fell under section 40(a) of the Act.

2. The Tribunal considered the case, and the appellant argued that the commission was for services rendered outside India, thus not liable for tax. The Tribunal dismissed the appeal. The appellant then raised a substantial question of law regarding the liability for TDS under section 40(a)(i) despite the introduction of sub-section (ia) to Section 40 post the relevant assessment year.

3. The High Court noted that an agreement with Textile Services Limited, Hong Kong, led to commission payments through its Delhi-based agent. The commission was received in India, and no evidence showed onward transmission to Hong Kong. Circular No.786 dated 7.2.2000 was cited, emphasizing that payments to non-residents for services outside India were not taxable. However, since the commission was received in India by the agent, the Circular was deemed inapplicable.

4. The appellant argued that section 40(a)(ia) was introduced after the relevant assessment year and thus not applicable. However, the court clarified that the disallowance was under sub-clause (i) of section 40(a) concerning non-residents. The liability for tax deduction was on the non-resident entity as per section 195 of the Act.

5. The court rejected the appellant's argument as a post-facto attempt, noting that the commission payments were received by the Indian agent on behalf of the Hong Kong entity in India. The court upheld the lower authorities' decision, ruling in favor of the Revenue.

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