2020 (2) TMI 29 - AT - Income Tax

TDS u/s 195 - commission to foreign entity and also paid advertisement fee and registration charges to Arab Fertilizers Association and foreign exhibition without deduction of TDS - Addition u/s 40(a)(ia)/40(a)(i) - HELD THAT - Neither the A.O. nor the ld. CIT(A) has examined the actual nature of services rendered by the agent so as to bring them to the ambit of the fee for technical services. We further note that the assessee has made payment of commission in respect of sale to one party namely Indo-Jordan Chemical Limited, Jordan. This fact is relevant to consider the nature of services rendered by the foreign agent when the assessee has made sales only to one party. Even it is not clear from the record produced before us whether the sale made to the Indo-Jordan Chemical Limited, Jordan was an international transaction being sold to associated enterprises (AE) or not. Since the A.O. has not taken up this issue and even held that the agent has rendered the services which is in the nature of managerial acumen and expertise and consequently payment is in the nature of fee for technical services, therefore, we do not go into the said issue whether any services were rendered by the agent or not. As regards the advertisement payment, the assessee has made payment to two different media entities namely Argus Media Limited, London, U.K. and Arab Fertilizers Association, Cairo Egypt, therefore, the issue of existence of PE of the recipient can be considered only when there is a DTAA between the India and the countries of the recipient non-resident entities. The registration fee and foreign exhibition participation fee was paid to Arab Fertilizers Association, Egypt, therefore, in order to consider benefit of DTAA and existence or non-existence of PE, the provisions of the respect DTAA are required to be considered. Since neither the A.O. nor the ld. CIT(A) have examined this issue by considering the relevant facts as well as the respective DTAAs if any between the India and the country of the recipient/non-resident, therefore, in our considered opinion, this issue requires a proper verification and examination. Accordingly, we set aside this issue to the record of the ld. CIT(A) for adjudication of the same afresh - Appeal of the assessee is allowed for statistical purposes only.

Summary

Issues Involved:
1. Disallowance of ?18,94,480/- on various foreign payments due to non-deduction of TDS under Section 195 of the Income Tax Act, 1961.
2. Nature of payments made to non-residents and their classification as fees for technical services.
3. Application of Section 9(1)(vii) and Section 40(a)(i) of the Income Tax Act, 1961.
4. Relevance of Double Taxation Avoidance Agreement (DTAA) in determining TDS liability.

Detailed Analysis:

1. Disallowance of ?18,94,480/- on Various Foreign Payments:
The assessee, engaged in the export of fertilizer improvement chemicals, paid commission, advertisement fees, and registration charges to foreign entities without deducting TDS as mandated under Section 195 of the Income Tax Act, 1961. The Assessing Officer (A.O.) disallowed these payments totaling ?18,94,480/- under Section 40(a)(i) on the grounds of non-deduction of TDS, asserting that these payments were in the nature of fees for technical services.

2. Nature of Payments Made to Non-Residents:
The A.O. classified the payments as fees for technical services under Section 9(1)(vii) of the Act, arguing that the payments were for managerial acumen and expertise. The assessee contended that these were genuine business transactions with no income arising in India, as the foreign entities had no Permanent Establishment (PE) in India. The payments included:
- Commission of ?9,90,672/- to Mo’ab for Fertilizer and Chemical LLC, Jordan.
- Advertisement fees of ?5,64,740/- to Argus Media Limited, UK, and ?1,12,036/- to Arab Fertilizers Association, Egypt.
- Registration charges of ?2,27,032/- paid in Egypt and Morocco.

3. Application of Section 9(1)(vii) and Section 40(a)(i):
The A.O. and the CIT(A) upheld the disallowance, citing the explanation to Section 195, which mandates TDS on payments to non-residents irrespective of their business presence in India. The CIT(A) emphasized that the assessee did not obtain any ruling from the Authority for Advance Ruling (AAR) to establish that the payments were not chargeable to tax in India.

4. Relevance of DTAA:
The Tribunal noted that neither the A.O. nor the CIT(A) examined the applicability of DTAAs between India and the countries of the recipients. The Tribunal highlighted the necessity of considering DTAAs to determine the taxability of payments in the hands of the recipients and the existence of PE. The Tribunal remanded the case to the CIT(A) for fresh adjudication, emphasizing that if the payments are not chargeable to tax in India, TDS under Section 195 is not required, even with the explanation to Section 195.

Conclusion:
The Tribunal set aside the issue to the CIT(A) for a thorough examination of the nature of services rendered, the applicability of DTAAs, and the existence of PE. The CIT(A) is to reassess whether the payments are chargeable to tax in India and thus liable for TDS. The appeal was allowed for statistical purposes, and the assessee was granted an opportunity for a hearing before the final decision.