2021 (12) TMI 707 - AT - Income Tax

TDS u/s 195 - Disallowance of sales commission paid to foreign agents u/s 40(a)(i) for non-deduction of tax at source - AO noticed that the assessee has paid sales commission to overseas agents located in Austria and Italy but has not deducted tax at source from the commission so paid - HELD THAT - As the foreign agents have given certificates that they have received commission only for getting orders - assessee has mentioned about the necessity of appointing agents by stating that Agents are needed because of their knowledge in the respective country s leather garments market, the competitive rates, the need and latest fashion trends, the design and quality of the products to be sold. Ultimately, the assessee has received sales orders through the agents and the impugned commission payments have been made to the foreign agents for getting sales orders. Hence, the sourcing commission paid cannot be considered as fee for technical services. Thus the tax authorities are not correct in law in holding that the commission was paid to the agents for rendering technical services in the form of managerial services. Thus, it shall constitute business income in their respective hands. There is no dispute that these foreign agents do not have permanent establishment in India and hence under Article 7 of India and Austria DTAA as well under Article 7 of India Italy DTAA, no business profit is taxable in India. Since no income out of commission payment is chargeable to tax in India in the hands of foreign agents, there is no requirement of deducting tax at source u/s 195 - disallowance made u/s 40(a)(i) in all the three years is not justified. - Decided in favour of assessee. Nature of expenditure - Disallowance of payments made for software purchase - AO held that there was enduring benefit on purchase of computer software and it to be capital expenditure and allowed depreciation thereon - HELD THAT - We notice that the Ld A.R is placing reliance on a case law in order to contend that software purchase is allowable as revenue expenditure. However, as rightly pointed out by Ld D.R, the assessee has not furnished any details relating to the computer software purchased by it. The assessee has not furnished the copy of contract entered with the supplier, nature of software purchased etc. Accordingly, in the absence of factual details, it will not be possible to apply the ratio of decision rendered in the case of IBM India Ltd 2013 (10) TMI 1225 - KARNATAKA HIGH COURT - We notice that the AO has allowed applicable depreciation on the software purchases treated as capital expenditure. Accordingly, we do not find any reason to interfere with the decision rendered by Ld CIT(A) on this issue.

Summary

Issues Involved:
1. Disallowance of sales commission paid to foreign agents under Section 40(a)(i) of the Income Tax Act for non-deduction of tax at source.
2. Disallowance of software purchase expenses in AY 2010-11.

Issue-wise Detailed Analysis:

1. Disallowance of Sales Commission Paid to Foreign Agents:
The assessee, engaged in manufacturing and exporting leather garments, challenged the disallowance of sales commission paid to foreign agents in Austria and Italy for the assessment years 2010-11 to 2012-13. The core issue was whether the assessee was liable to deduct tax at source under Section 195 of the Income Tax Act from the commission payments made to these agents.

The Assessing Officer (AO) argued that the services rendered by the foreign agents fell under "technical services" and included "advertising and marketing services," necessitating tax deduction at source. The AO contended that the assessee should have approached the AO under Section 195(2) to determine the taxability of the commission income. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's view.

The assessee countered that the foreign agents did not have a Permanent Establishment (PE) in India, and therefore, their income was chargeable in their respective countries as per the Double Taxation Avoidance Agreement (DTAA). The assessee argued that the services provided by the agents were normal selling agent services and did not qualify as "technical services."

The Tribunal examined the nature of services provided by the foreign agents and concluded that they were not managerial services but rather services typically rendered by selling agents. The Tribunal referred to the Hon'ble Madras High Court's decision in CIT vs. Wheels India Ltd, which held that sourcing commission paid does not fall under technical services. The Tribunal also noted that the foreign agents had certified that they received commission only for procuring orders.

The Tribunal held that since the foreign agents did not have a PE in India, their income was not taxable in India under Article 7 of the India-Austria and India-Italy DTAA. Consequently, there was no requirement to deduct tax at source under Section 195. The Tribunal directed the AO to delete the disallowance made under Section 40(a)(i) for all three years.

2. Disallowance of Software Purchase Expenses in AY 2010-11:
The assessee also contested the disallowance of software purchase expenses amounting to ?4,64,313 in AY 2010-11. The AO treated the software purchase as capital expenditure, granting depreciation instead of allowing it as a revenue expenditure. The CIT(A) confirmed the disallowance, noting that the assessee failed to furnish details related to the software purchase.

The assessee relied on the Hon'ble Karnataka High Court's decision in CIT vs. IBM India Ltd, which held that payment for application software enhancing productivity or efficiency should be treated as revenue expenditure. However, the Tribunal observed that the assessee did not provide sufficient details about the software purchase, such as the copy of the contract or the nature of the software.

In the absence of factual details, the Tribunal found it challenging to apply the ratio of the decision in IBM India Ltd. Consequently, the Tribunal upheld the CIT(A)'s decision to treat the software purchase as capital expenditure and allow applicable depreciation.

Conclusion:
The appeal for AY 2010-11 was partly allowed, with the Tribunal directing the deletion of disallowance under Section 40(a)(i) but upholding the disallowance of software purchase expenses. The appeals for AY 2011-12 and 2012-13 were allowed, directing the deletion of disallowance under Section 40(a)(i).