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2021 (10) TMI 1138 - AT - Income TaxTDS u/s 195 - payments abroad of export commission to non-resident the foreign agent for the procurement of export orders - FTS' under the India-France DTAA - disallowance u/s 40(a)(i) - HELD THAT - As relying on STERIA INDIA LTD. (EARLIER KNOWN AS XANSA (INDIA) LTD.) 2018 (4) TMI 578 - DELHI HIGH COURT for bringing the services under the net of Fee for Technical Services (FTS) under the India France DTAA, the 'make available' clause has to be satisfied. But in the services rendered by the non-resident of procuring export order for the assessee, no knowledge has been provided to the assessee which could be exploited further by the assessee. In such circumstances, the services rendered by the non-resident cannot be held as 'FTS' under the India-France DTAA. Accordingly, such services will not be chargeable in India in the hands of nonresident under DTAA and, therefore, no liability to deduct tax at source will arise. Consequently, payment to said non-resident is not liable to disallowance under section 40(a)(i) of the Act. - Decided in favour of assessee.
Issues Involved:
1. Disallowance of commission paid to a non-resident foreign payee for non-deduction of TDS. 2. Consistency in disallowance across different assessment years. 3. Applicability of Section 9 and Section 195 of the Income-tax Act, 1961. 4. Interpretation of Double Taxation Avoidance Agreement (DTAA) with France. 5. Principles of equity, natural justice, and provisions of the Act. Issue-wise Detailed Analysis: 1. Disallowance of Commission Paid to Non-resident Foreign Payee: The primary issue revolves around the disallowance of ?1,16,99,172/- commission paid to M/s. Ace Trading Company, France, by the assessee for procuring export orders. The Assessing Officer (AO) disallowed this amount under Section 40(a)(i) of the Income-tax Act, 1961, due to non-deduction of TDS as required under Section 195. The AO argued that the commission payment constituted "fees for technical services" (FTS) under Section 9(1)(vii) of the Act, which was taxable in India even if services were rendered outside India but utilized in India. 2. Consistency in Disallowance Across Different Assessment Years: The assessee contended that the disallowance was inconsistent with the treatment in previous assessment years. Specifically, in AY 2010-11, the CIT(A) had deleted a similar disallowance, and the Tribunal upheld this deletion. The Tribunal noted that the facts and circumstances had not changed since AY 2010-11, and the scope of services rendered by M/s. Ace Trading Company remained the same. 3. Applicability of Section 9 and Section 195 of the Income-tax Act, 1961: The AO cited the Explanation to Section 9(1)(vii) inserted by the Finance Act 2010, which states that income from services rendered outside India but utilized in India is deemed to accrue or arise in India. However, the Tribunal found that the commission paid to M/s. Ace Trading Company did not qualify as FTS under the DTAA between India and France, thus negating the requirement for TDS under Section 195. 4. Interpretation of Double Taxation Avoidance Agreement (DTAA) with France: The Tribunal emphasized the DTAA between India and France, particularly Article 7, which classifies the commission as business income. Since M/s. Ace Trading Company did not have a permanent establishment in India, the income was not chargeable to tax in India. The Tribunal also referenced the Most Favoured Nation (MFN) clause in the DTAA, which allows for the application of more beneficial provisions from other DTAAs, such as the India-UK DTAA. Under these provisions, the services rendered did not meet the "make available" clause required to classify them as FTS. 5. Principles of Equity, Natural Justice, and Provisions of the Act: The Tribunal found that the disallowance was based on erroneous views and non-appreciation of facts and law. The AO did not provide specific opportunities for the assessee to present evidence, and the disallowance was made on suspicion and conjecture. The Tribunal held that the disallowance was unwarranted and against the principles of equity and natural justice. Conclusion: The Tribunal set aside the orders of the CIT(A) and the AO, deleting the disallowance of ?1,16,99,172/- commission paid to M/s. Ace Trading Company. The Tribunal ruled that the commission was not taxable in India under the DTAA with France, and therefore, no TDS was required under Section 195, making Section 40(a)(i) inapplicable. The appeal of the assessee was allowed.
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