2019 (5) TMI 1602 - AT - Income Tax

TDS u/s 195 - commission paid to foreign commission agent - Addition u./s 40(a)(ia) - as per assessee foreign agents rendered services out of India for procurement of the orders from the overseas buyers and for getting approval of the goods - PE in India - HELD THAT - There is no dispute that the agents being located outside India and not resident of India were canvassing sales for the assessee for customers abroad. It is an admitted position by the AO himself that the agents are not resident in India further to make disallowance AO did not establish that they have any permanent establishment in India. Therefore it is not a case where the non-resident agents are carrying on any business activity in India. Assessee has engaged the services of non-resident agents outside India on pure commercial considerations for its sales outside India and also to pursue the payments to be made by the purchasers as located abroad. AO has also not established that what is the business connection of those agents in India in terms of provisions of section 9(1) (i). AO has merely mentioned these section but the criteria for satisfying them have also not been established. Even Otherwise Section 9(1)(i) is applicable on the net the profits of a non - resident which can reasonably be attributed to operations carried out in India. In the prsesnt case the agents have not carried out any operations in India. He also did not specify that what kind of services in the nature of Managerial, Technical or consultancy rendered by these agents to assessee to fall the services under the definition of Fees for technical services u/s 9 (1) (vii) . The principle still holds good that the payments to non-resident are liable for tax in India only if they satisfy the test of chargeability in India. In the present case the ld AO has not established it. - Decided in favour of assessee

Issues Involved:
1. Disallowance of commission paid to foreign commission agents due to non-deduction of tax at source under Section 195 and Section 9(1)(i) of the Income-Tax Act.
2. Impact of withdrawal of Circular Nos. 23 of 1969 and 786 of 2000 by CBDT on such foreign remittance.
3. Applicability of Circular No. 7/2009 of the CBDT mandating TDS on foreign remittance.

Issue-wise Detailed Analysis:

1. Disallowance of Commission Paid to Foreign Commission Agents:
The revenue challenged the deletion of additions made by the Assessing Officer (AO) on account of commission expenses paid to foreign commission agents without deduction of tax at source under Section 195 and Section 9(1)(i) of the Income-Tax Act. The AO had disallowed the commission payments, arguing that the services provided by foreign agents included negotiating orders and other activities that required tax deduction at source as per Section 9(1)(i) and 9(1)(vii) of the Act. The AO also cited the withdrawal of Circular Nos. 23/1969 and 786/2000, which previously provided immunity to such foreign remittances.

The CIT(A) deleted the disallowance, stating that the commission agents did not have any permanent establishment in India and that the services were rendered outside India. It was noted that the AO failed to establish that the agents had any business connection in India or performed any operations in India. The CIT(A) emphasized that the commission payments did not attract the provisions of Section 195 as the income did not accrue or arise in India.

The Tribunal upheld the CIT(A)’s decision, agreeing that the AO did not provide evidence of any services performed in India by the foreign agents. The Tribunal cited various judicial pronouncements, including decisions from the Delhi High Court and other Tribunals, which supported the view that commission payments to non-resident agents for services rendered outside India are not taxable in India.

2. Impact of Withdrawal of Circular Nos. 23 of 1969 and 786 of 2000:
The AO relied on the withdrawal of Circular Nos. 23/1969 and 786/2000 by Circular No. 7/2009, arguing that it made tax deduction at source mandatory for such payments. The CIT(A) countered this by stating that the withdrawal of these circulars did not alter the fundamental legal position regarding the taxability of commission payments to non-resident agents. The Tribunal agreed, noting that the withdrawal of the circulars simply meant that the law had to be applied as interpreted before the introduction of these beneficial circulars. The Tribunal reiterated that the commission payments were not taxable in India as the services were rendered outside India and the agents did not have any business connection or permanent establishment in India.

3. Applicability of Circular No. 7/2009 of the CBDT:
The AO argued that Circular No. 7/2009 mandated the deduction of tax at source on foreign remittances. However, the CIT(A) and the Tribunal found that the AO did not establish that the commission payments fell under the definition of fees for technical services or that the agents had any business connection in India. The Tribunal noted that the principle still holds that payments to non-residents are liable for tax in India only if they satisfy the test of chargeability in India. Since the AO failed to establish that the commission payments were chargeable to tax in India, the provisions of Section 195 were not applicable.

Conclusion:
The Tribunal dismissed the appeals filed by the revenue for both Assessment Years 2011-12 and 2012-13, confirming the CIT(A)’s order deleting the disallowance of commission payments to foreign agents. The Tribunal held that the AO did not establish that the foreign agents had any business connection in India or rendered any services in India, and thus, the commission payments were not taxable in India. The Tribunal also noted that the withdrawal of Circular Nos. 23/1969 and 786/2000 did not change the legal position regarding the taxability of such payments.

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