2018 (6) TMI 96 - AT - Income Tax

TDS u/s 195 - commission expenditure paid to USA based payee - non deduction of TDS - Indo - USA DTAA benefits - PE In India - Held that - Once the assessee s payee derives business profits in question without having permanent establishment not taxable in India, the instant taxpayer s case is very well covered under Article 7 of the Indo-USA Double Avoidance Agreement - as per Section 90(2) Government of India has executed Double Taxation Avoidance Agreement and the assessee to whom it applies, the provision of the Act would be applicable to the extent they are more beneficial - thus CIT(A) has rightly reversed the AO s action invoking the disallowance - Decided in favor of assessee.

Summary

Issues:
Appeal against disallowance of commission expenditure for export overseas representation charges without TDS deduction under section 195 of the Income Tax Act, 1961.

Analysis:
The judgment involves two Revenue's appeals for assessment years 2010-11 and 2012-13 against orders of Commissioner of Income Tax (Appeals) regarding disallowance of commission expenditure for export overseas representation charges without TDS deduction. The Revenue sought to restore the Assessing Officer's action disallowing the expenditure in both assessment years. The CIT(A) had allowed the appeal in the latter assessment year based on detailed discussion in the former assessment year. The AO disallowed the expenditure under section 40(a)(ia) of the IT Act, 1961, as TDS was not deducted on payments made to a USA-based payee for professional services. The CIT(A) held that the payee's income was not chargeable to tax in India, and hence, TDS deduction was not required under section 195. The Revenue contended that the payee's income was taxable in India, but failed to provide evidence of services rendered in India. The agreement between the parties indicated that the payee did not have a permanent establishment in India. The judgment referred to the Indo-USA Double Taxation Avoidance Agreement and section 90(2) of the Act, concluding that the payee's business profits, without a permanent establishment in India, were covered under the agreement. Therefore, the CIT(A) rightly reversed the AO's disallowance, and the Revenue's appeals were dismissed.

The judgment highlights the importance of determining the tax liability of non-resident payees under section 195 of the IT Act, 1961. It emphasizes the need for payees' income to be chargeable to tax in India for TDS deduction to apply. The judgment also underscores the significance of international tax agreements, such as the Indo-USA Double Taxation Avoidance Agreement, in determining tax liabilities of non-residents. The analysis showcases the application of legal principles and precedents, including the interpretation of relevant sections of the IT Act and international tax agreements, in resolving disputes related to TDS deductions on payments to non-resident entities for professional services.