2019 (4) TMI 1651 - AT - Income Tax

Disallowance u/s 40(a)(ia) - TDS u/s 195 - payment of commission to the foreign agents - CIT (A) has examined the nature of services provided by the foreign agent to the assessee and has come to the conclusion that it is fees for technical services - income had accrued/arisen to the foreign agent in India - Specific provision of section 5(2)(b) r.w.s 9(1)(i) - PE in India - no notice by CIT (A) to consider commission as fees for technical services - HELD THAT - Undoubtedly, the powers of the CIT (A) are co-terminus with that of the AO and therefore, the CIT (A) could have examined the facts of the case if the AO has not done so but before doing so, the CIT (A) is required to give a notice to the assessee. In the present case, the CIT (A) has not given any notice to the assessee but has only examined the issue on his own and has given a finding that the payment made by the assessee is fee for technical services . Therefore, the finding of the CIT (A) is against the principles of natural justice and has to be set aside on this ground alone. We hold that the business receipts of the foreign residents are not taxable in India since the agents have no PE in India and therefore, the assessee was not required to make TDS u/s 195 of the Act. Therefore, the assessee s appeals for all the three A.Ys are allowed.

Summary

Issues Involved:
1. Disallowance of commission paid to foreign agents due to non-deduction of tax at source under Section 195 of the Income Tax Act.
2. Classification of services rendered by foreign agents as "fees for technical services" and its taxability under the Double Taxation Avoidance Agreement (DTAA).

Detailed Analysis:

Issue 1: Disallowance of Commission Paid to Foreign Agents Due to Non-Deduction of Tax at Source Under Section 195

The assessee-company, engaged in various services including Testing and Analysis of Materials, filed its returns for the assessment years 2012-13, 2013-14, and 2014-15. The Assessing Officer (A.O.) noted that the assessee had paid a commission to foreign agents without deducting tax at source, as required under Section 195 of the Income Tax Act. The A.O. relied on the decision of the Authority for Advance Rulings (AAR) in the case of SKF Boilers and Driers Pvt Ltd, concluding that the income had accrued or arisen in India and was thus taxable. Consequently, the A.O. disallowed the commission under Section 40(a)(ia) of the Act.

The assessee contended that the commission was paid to non-residents who had no Permanent Establishment (PE) in India and that the services were rendered outside India. Therefore, according to the assessee, the income was not taxable in India under Section 9 of the IT Act, and there was no requirement to deduct tax at source. The CIT(A) upheld the A.O.'s decision, asserting that the services rendered by the foreign agents were in the nature of "fees for technical services," making them taxable even under the DTAA.

Upon appeal, the Tribunal found that the A.O. had not classified the payments as "fees for technical services" or "royalty" but had only disallowed the commission based on the income being deemed to accrue in India. The Tribunal noted that the CIT(A) had overstepped by classifying the payments as "fees for technical services" without giving prior notice to the assessee, thus violating principles of natural justice. Moreover, the Tribunal observed that the foreign agents rendered services outside India and received payments outside India, and the A.O. did not dispute that these were business receipts of the foreign agents.

The Tribunal referenced multiple judicial precedents, including decisions from the Coordinate Bench and the Hon'ble Supreme Court, which held that payments made to non-residents for services rendered outside India are not taxable in India if the non-residents have no PE in India. Consequently, the Tribunal concluded that the provisions of Section 195 were not applicable, and the disallowance under Section 40(a)(ia) was not justified.

Issue 2: Classification of Services Rendered by Foreign Agents as "Fees for Technical Services"

The CIT(A) had classified the services rendered by the foreign agents as "fees for technical services" without providing notice to the assessee, thus violating principles of natural justice. The Tribunal found this classification erroneous and unsustainable. The Tribunal emphasized that the services provided by the foreign agents were related to sales, marketing, customer service, and management support activities, which did not qualify as "fees for technical services."

The Tribunal also referenced the DTAA, which stipulates that business income of a non-resident is taxable in India only if the non-resident has a PE in India. Since the foreign agents had no PE in India, their business receipts were not taxable in India. The Tribunal cited various judicial precedents, reinforcing that the payments made to non-residents for services rendered outside India are not subject to tax in India, and hence, no TDS under Section 195 was required.

Conclusion:

The Tribunal set aside the orders of the A.O. and the CIT(A), holding that the commission paid to foreign agents was not taxable in India as the agents had no PE in India and the services were rendered outside India. Consequently, the assessee was not required to deduct tax at source under Section 195. The appeals for all three assessment years were allowed in favor of the assessee.