2018 (10) TMI 615 - HC - Income Tax

Addition u/s 40(a)(ia) for non deduction of TDS - Commission paid to no-resident - income deemed to accrue or arise in India - Held that - The prime requirement therefore for applicability of the section is that the payment to the nonresident should be a sum chargeable under the provisions of the Act. In other words, the payment is not an income which is chargeable to tax in India. Requirement of deducting tax at source under section 195 of the Act would not arise. The nonresident agents appointed by the assessee for procuring export orders do not have permanent establishment in India. Their agents are situated outside India. Their activities as commission agents are being carried out outside India. The Tribunal therefore correctly held that there was no liability on the assessee to deduct tax at source. Merely because a portion of the sale to the overseas purchasers took place in India, would not change situation vis a vis the commission agents. Decided against the revenue.

Summary

Issues:
Appeal against deletion of addition made on account of Commission paid to non-resident u/s. 40(a)(ia) of the Act.

Analysis:
The issue in this case pertains to the deletion of an addition made on account of commission paid to a non-resident under section 40(a)(ia) of the Act. The Assessing Officer observed that the assessee had paid a significant amount to a non-resident without deducting tax at source. The assessee argued that since the services were rendered outside India, no income had accrued or arisen in India, relying on a Supreme Court decision. However, the Assessing Officer disallowed the deduction and added the entire amount under section 40(a)(ia) of the Act. The CIT(A) partially ruled in favor of the assessee but upheld the addition of commission payment of a specific amount, stating that the sale activity took place in India. The Tribunal, on appeal, sided with the assessee, emphasizing that no income had arisen or accrued in India, hence no tax deduction was required.

The crux of the matter lies in the interpretation of section 195 of the Act, which mandates tax deduction at source for payments to non-residents. The key condition for the section's applicability is that the payment should be chargeable under the Act. The Supreme Court precedent highlighted that tax deduction is not necessary unless the remittance includes taxable income. Additionally, section 9 of the Act deems certain incomes to accrue or arise in India, including those related to business connections or assets in India. However, in this case, the nonresident agents had no permanent establishment in India, and their activities were conducted outside the country. Consequently, the Tribunal correctly concluded that the assessee was not obligated to deduct tax at source, despite some sales occurring in India.

In conclusion, the High Court dismissed the Tax Appeal, affirming the Tribunal's decision that no tax deduction was required on the commission paid to non-resident agents due to the absence of income accrual or arising in India. The judgment underscores the significance of determining the source of income and the applicability of tax deduction provisions based on the nature of payments to non-residents.