2023 (10) TMI 1015 - AT - Income Tax

Disallowance u/s 40(a) - tds u/s 195 - fee for technical services as liable to be taxable in India as income deemed to have accrued/arisen in India - HELD THAT - As decided in 2023 (4) TMI 1260 - ITAT DELHI assessee receives the orders from parties through agents electronically and the goods are dispatched directly to the party with a copy invoice to agents. The role of the agent is for procuring orders/RFQ and getting the payment released from party. When the goods are exported and the payments are released by the party, the agents raise invoice in respect of commission giving complete details of sale invoice, the amount received and its commission. No information in the nature of technical, management or consultancy services had been provided by any of the agent. The assessee had no PE in USA. Both the agents are tax residents of USA and had no business connection in India nor they have any PE in India. None of the agents is related to any of the Director of the company directly or indirectly. All the payments have been made in US through proper banking channels. None of the ingredient contained in the definition of Fees for technical services as per Explanation 2 to section 9(1)(vii) and/or in Article 12(4) of the India-USA DTAA is found in the impugned payment of commission by the assessee to AM and ETCS. No managerial services or technical services are involved since the non-resident parties (AM and ETCS) were merely commission agents appointed to procure purchase orders for assessee s products. Further, the impugned payment is not in relation to any services which make available any technical skill or know-how. Nothing of the sort was involved in the assessee s case. In Mahindra and Mahindra Ltd 2009 (4) TMI 207 - ITAT BOMBAY-H it has been held that where the payer only obtained the benefit from the services, but did not get any technical knowledge experience or skill in its possession for future use, it cannot be said that technical know-how was made available. Thus the impugned disallowance u/s 40(a)(i) of the Act made by the Ld. AO and confirmed by the Ld. CIT(A) is not sustainable - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance under Section 40(a)(i) of the Income Tax Act, 1961.
2. Levy of interest under Section 234A of the Income Tax Act, 1961.

Issue 1: Disallowance under Section 40(a)(i)

The primary issue revolves around the disallowance made by the Assessing Officer (AO) under Section 40(a)(i) of the Income Tax Act, 1961, due to the assessee's failure to deduct tax at source on payments made to foreign agents for services deemed as "Fees for Technical Services" (FTS). The AO's stance was that these services fell under Section 9(1)(vii) of the Act and were taxable in India, thus necessitating tax deduction under Section 195.

The assessee contested this disallowance, arguing that the payments were merely commissions for procuring orders and not for technical or consultancy services. The assessee further cited the principle of rule of consistency, highlighting that similar payments had been allowed in previous assessment years (AYs) without disallowance.

The tribunal referred to the agreements between the assessee and the foreign agents, noting that the services provided did not qualify as technical or consultancy services as per the definitions in Section 9(1)(vii) and Article 12(4) of the India-USA DTAA. It was emphasized that the services rendered were typical of commission agency business, involving no transfer of technical knowledge or skill. The tribunal also referred to several judicial precedents, including the Delhi High Court's decision in DIT vs. Panalfa Autoelektrik Ltd., which supported the assessee's position.

Therefore, the tribunal concluded that the disallowance under Section 40(a)(i) was not sustainable and decided in favor of the assessee, setting aside the orders of the AO and CIT(A).

Issue 2: Levy of Interest under Section 234A

Regarding the levy of interest under Section 234A for AY 2014-15, the tribunal upheld the CIT(A)'s decision that the extended date for filing the return did not exempt the assessee from paying interest under Section 234A. Therefore, this ground of appeal was dismissed.

Conclusion:

Consequently, ITA No. 116/Del/2020 was allowed partly, and ITA No. 117/Del/2020 was allowed in favor of the assessee. The tribunal's order was pronounced in the open court on 11th October 2023.