2018 (10) TMI 1299 - AT - Income Tax

TDS u/s 195 - non-deduction of tax on commission paid to non-resident outside India - addition u/s 40(a)(i) - income accrued in India - PE in India - Held that - As decided in assessee s own case AO has accepted that the payment made by the assessee is on account of commission and compensation to the foreign agent and therefore it is not the case of the AO that the payment in question is either fee for technical service or royalty which could be taxed in India as per provisions of sec.9(1) of the Act. We further note that the AO has supported his finding by citing the reason that commission income arises in India because right to receive commission arises when the order is executed by the assessee in India. Logic and contention of the AO is absolutely erroneous and based on mis-interpretation of the term accrue or arise in India as per the provisions of sec.9(1). The commission is paid to foreign agent for services rendered by the agent outside India and the agent has no business link or source of income in India. Therefore, in absence of any business connection or source of income and consequently any permanent establishment in India, the said income in the hands of the foreign agent is not taxable in India. - decided in favour of assessee.

Summary

Issues:
1. Disallowance made under section 40(a)(i) of the Income Tax Act, 1961 on foreign agent commission.

Detailed Analysis:
The appeal and cross objection were filed against the order of the Commissioner of Income Tax (Appeals) for the assessment year 2013-14. The main issue revolved around the disallowance made under section 40(a)(i) of the Income Tax Act, 1961, amounting to ?67,19,913, on account of foreign agent commission. The Assessing Officer questioned why TDS was not deducted on the commission claimed by the assessee. The assessee contended that the commission did not fall under fee for technical service and was not taxable in India due to absence of business connection in India. The Assessing Officer, however, rejected this argument citing that the matter was pending before the Bombay High Court.

The Commissioner of Income Tax (Appeals) noted that for the assessment years 2010-11 and 2011-12, it was held that no TDS was required to be deducted on commission paid to the agent in the assessee's case. Relying on this precedent, the Commissioner decided the issue in favor of the assessee. The Revenue challenged this decision before the Appellate Tribunal.

During the proceedings, the Departmental Representative relied on a decision by the Authority for Advance Rulings, New Delhi. However, the Tribunal observed that in the assessee's own case for earlier years, it was held that the commission paid to the foreign agent was not taxable in India due to the absence of a business connection or source of income in India. The Tribunal found the Assessing Officer's reasoning erroneous and upheld the Commissioner's decision based on the precedent in the assessee's case.

The Tribunal further noted that the decision in the assessee's case had not been reversed by the Bombay High Court, and therefore, the decision of the Authority for Advance Rulings was deemed inapplicable. The Tribunal dismissed the Revenue's appeal and the assessee's cross objection as infructuous since the Commissioner's order was upheld. The judgment was pronounced on October 23, 2018.