2019 (4) TMI 568 - HC - Income Tax

Admittion of additional evidences under Rule 46(A)(1) - AO had granted ample opportunity to the assessee to adduce evidence - assessee was not prevented by any sufficient cause from producing the evidence - genuineness of the commission payment raised by CIT(A) - HELD THAT - It is evident that it was at the instance of the Commissioner (Appeals) that the assessee had produced the additional evidence on record, which would fall within the ambit of subrule (4) of rule 46A of the rules, and hence, the question of violation of such rule on the ground urged on behalf of the appellant based on sub-rules (1) and (2) of rule 46A, does not arise. Moreover, the Assessing Officer has been given opportunity to deal with the additional evidence produced by the assessee as the remand report was called for. Under the circumstances, no substantial question of law can be said to have arisen insofar as this issue is concerned. Disallowance u/s 40(a)(ia) - commission paid to foreign agents without TDS u/s 195 - Income deemed to accrue or arise in India - PE in India - HELD THAT - In this case the source of income for the overseas agents is the services rendered abroad by them to the assessee by way of searching prospective foreign buyers/clients and the payment is received by them directly outside India in their country. Thus, the non-resident overseas agents have offered services to procure export sales order. All these services are rendered abroad, only the payment is made by the assessee from India. Insofar as the nonresident overseas agent is concerned, the source of income is the transaction whereby services are offered by them to the assessee by procuring export sales orders abroad. The overseas agents do not have any permanent establishment or any business connection in India nor is the source of income through, by means of, in consequence of or by reason of any source of income in India. The revenue is trying to confuse two aspects, namely, it is trying to equate the source of payment with the source of income. Insofar as the source of income, it is not the place from where the payment is made, but the place where the transaction which yields such income has taken place. As discussed earlier, the source of income is the services rendered by the overseas agent abroad and not the payment made by the assessee, and hence, it cannot be said that any income accrues of arises to the overseas agent India as contemplated in section 9 of the Act. Under sub-section (2) of section 5 of the Act, insofar as a non-resident is concerned, the income should have been received or deemed to be received in India in such year; or should accrue or arise or deemed to accrue or arise to him in India during such year. In the facts of the present case, neither of the conditions is satisfied. Therefore, when the commission paid to the non-resident agents was neither received or deemed to be received in India nor accrued or was deemed to accrue in India, no income was chargeable to tax under the provisions of the Act. When the payment made by the assessee to the overseas agent for services rendered abroad is not income chargeable to tax in India, there was no obligation cast upon the respondent assessee to deduct tax at source u/s 195 and consequently, the provisions of section 40(a)(ia) would not be attracted. The Tribunal, therefore, did not commit any error. No question of law can therefore, be said to arise. Requirement to application of non deduction of TDS u/s 195(2) - HELD THAT - Section 195(2) starts with the words where the person responsible for paying any sum chargeable under the Act to a non-resident , therefore, for the purpose of falling within the ambit of section 195(2) the person should be responsible for paying any sum chargeable under the Act. In the facts of the present case, the sum paid by the assessee to the overseas agent not being chargeable to tax under the Act, there is no question of making an application u/s 195. - Decided against revenue.

Summary

Issues Involved:
1. Admission of additional evidence by the Commissioner (Appeals) in violation of Rule 46A(1) of the Income Tax Rules, 1962.
2. Disallowance under section 40(a)(ia) of the Income Tax Act, 1961 for non-deduction of tax on commission payable to foreign agents.

Issue-wise Detailed Analysis:

1. Admission of Additional Evidence:
The appellant contended that the Commissioner (Appeals) admitted additional evidence submitted by the assessee during appellate proceedings, violating Rule 46A(1) of the Income Tax Rules. Rule 46A restricts the appellant from producing additional evidence unless specific conditions are met, such as the Assessing Officer refusing to admit evidence or the appellant being prevented by sufficient cause from producing the evidence earlier.

The Commissioner (Appeals) called for a remand report from the Assessing Officer, who requested not to admit the additional evidence as the assessee did not fall within the exceptional clauses of Rule 46A(1). However, the Commissioner (Appeals) accepted the additional evidence and allowed the appeal. The Tribunal upheld this decision.

The court referred to Rule 46A(4), which permits the Appellate Commissioner to direct the production of any document or examination of any witness to dispose of the appeal. The Commissioner (Appeals) noted that the Assessing Officer had not examined the genuineness of the commission expenses during the assessment proceedings, and the additional evidence was produced at the instance of the Commissioner (Appeals). Therefore, the court held that the case fell within the ambit of Rule 46A(4), and there was no violation of Rule 46A. The court concluded that no substantial question of law arose regarding this issue.

2. Disallowance under Section 40(a)(ia):
The second issue concerned the disallowance of commission expenses under section 40(a)(ia) for non-deduction of tax at source on payments to foreign agents. The Assessing Officer disallowed the commission paid to overseas agents, deeming it income accruing or arising in India under section 9(1)(i) of the Act. The Commissioner (Appeals) and the Tribunal allowed the appeal, holding that the income did not accrue or arise in India.

The appellant argued that the commission income arose in India when the order was executed by the assessee in India, and thus, the income was taxable under sections 5(2)(b) and 9(1)(i) of the Act. The appellant relied on rulings by the Authority for Advance Rulings and other cases to support this view.

The court referred to section 195 of the Act, which mandates the deduction of tax at source only if the payment to a non-resident is chargeable under the Act. The court cited the Supreme Court's decision in GE India Technology Centre (P) Ltd. v. Commissioner of Income Tax, which held that the obligation to deduct tax arises only when the sum is chargeable under the Act.

The court examined the facts and found that the overseas agents rendered services abroad, and the payment was received outside India. The agents had no business connection or permanent establishment in India. The court held that the source of income was the services rendered abroad, not the payment made from India. Therefore, the income did not accrue or arise in India under section 9 of the Act.

The court also addressed the appellant's contention that the assessee should have sought exemption under section 195(2) if the payment was not chargeable to tax. The court clarified that section 195(2) applies only when the payment is chargeable to tax, which was not the case here.

The court concluded that the Tribunal did not err in its decision, and no substantial question of law arose. Consequently, the appeals were dismissed.