2018 (4) TMI 257 - AT - Income Tax

TDS u/s 195 - Addition u/s 40(a)(i) - Non deduction of tds - commission payment made to non-resident agents & outward freight charges paid to foreign shipping company through agents - Inocme accrued in India - PE in India - Held that - Admittedly, these payments are on account of commission made to foreign parties and similarly, the outward freight payments also made to foreign shipping companies. Admittedly there is no TDS deducted by the assessee on these payments. On identical facts and circumstances the coordinate bench of ITAT in the case of DCIT vs. Ardeshi B. Cursetjee & Sons Ltd. (2008 (3) TMI 500 - ITAT MUMBAI) held that where the assessee has paid commission to its foreign agents outside India for services rendered outside India and claimed deduction of the same as business expenditure, the case of foreign agent is not covered by the provisions of section 9 and income of the foreign agent will not be taxed in India. The responsibility of deducting tax at source from the remittances of the commission to the foreign agent would arise only when such commission is taxable in India in the hands of the recipient. The income of the recipient in the form of commission received from assessee was not chargeable to tax in India. Therefore in the present case also the lower authorities have wrongly interpreted the provisions of section 40(a)(i) of the Act and also section 195 of the Act. The assessee has submitted copy of letter of nonresidence regarding their tax residence and non-permanent establishment in India that there company is incorporated in New Zealand and Singapore. - Decided in favour of assessee. Addition on account of notional interest chargeable on debit balance of one of the partners of the firm - Held that - As assessee s counsel could not satisfied its claim by filing any evidence and could not point out any infirmity in the order of CIT(A). Hence, the same is confirmed and this issue of the appeal of assessee is dismissed.

Summary

Issues Involved:
1. Disallowance of expenses related to commission payment made to non-resident agents and outward freight charges paid to foreign shipping company without TDS deduction under section 40(a)(i) of the Income Tax Act.
2. Addition on account of notional interest chargeable on debit balance of a partner of the firm.

Analysis:

Issue 1: Disallowance of Expenses without TDS Deduction
The primary issue in this case revolves around the disallowance of expenses related to commission payments made to non-resident agents and outward freight charges paid to foreign shipping companies without TDS deduction under section 40(a)(i) of the Income Tax Act. The Assessing Officer (AO) disallowed commission payments made to foreign parties and outward freight charges without TDS deduction, leading to an appeal by the assessee before the Commissioner of Income Tax (Appeals) [CIT(A)]. The CIT(A) upheld the AO's action, prompting the assessee to appeal before the Tribunal.

The Tribunal analyzed the facts and circumstances of the case, noting that the payments were made to foreign parties without TDS deduction. Referring to a similar case, the Tribunal held that the income of foreign agents would not be taxed in India if the services were rendered outside India. The Tribunal also highlighted the responsibility to deduct tax at source only when the recipient's income is taxable in India. Additionally, the Tribunal cited a High Court case where payments to non-resident shipping companies or their agents were considered under section 172, excluding the need for TDS deduction. Based on these precedents and factual evidence provided by the assessee, the Tribunal concluded that the lower authorities erred in disallowing the expenses. Consequently, the disallowances were deleted, and the issue was decided in favor of the assessee.

Issue 2: Addition on Account of Notional Interest
The second issue pertains to the addition made on account of notional interest chargeable on the debit balance of a partner of the firm. The AO disallowed a sum claimed as capital expenditure, treating it as interest chargeable on the partner's debit balance. The CIT(A) confirmed the AO's action, emphasizing that the partner's capital account in debit balance indicated the utilization of interest-bearing funds by the partner. The CIT(A) dismissed the argument regarding the supplementary partnership deed exempting interest payment to the partner, focusing on the utilization of interest-bearing funds by the partner to the detriment of the firm.

During the appeal before the Tribunal, the assessee's counsel failed to provide evidence or challenge the CIT(A)'s order effectively. As a result, the Tribunal confirmed the CIT(A)'s decision, dismissing the appeal on this issue. The addition on account of notional interest chargeable on the partner's debit balance was upheld.

In conclusion, the Tribunal partly allowed the assessee's appeal, deleting the disallowances related to expenses without TDS deduction but confirming the addition on account of notional interest chargeable on the partner's debit balance.

Order pronounced in the open court on 04-04-2018.