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Issues Involved:
1. Addition of Rs. 23,688 on account of difference in sales. 2. Disallowance of commission payment to the foreign concern M/s. Esopelli & Co., SAS, Italy. Summary: 1. Addition of Rs. 23,688 on account of difference in sales: The first ground in this appeal is in regard to the addition of a sum of Rs. 23,688 on account of difference in sales. At the time of hearing of this appeal this ground was not pressed, Hence this ground of appeal by the assessee is treated as dismissed. 2. Disallowance of commission payment to the foreign concern M/s. Esopelli & Co., SAS, Italy:The next ground is to the effect that the CIT(A) erred in confirming the disallowance of the commission payment to the foreign concern M/s. Esopelli & Co., SAS, Italy. In computing the income for the year ending 31-3-1991 the assessee claimed deduction for a sum of Rs. 15,09,290 as sales commission payable to Esopelli & Co., SAS, Italy. The Assessing Officer was of the view that the assessee ought to have deducted tax at source under chapter XVIIB of the I.T. Act on the sum payable outside India and as there was default in regard to tax deduction the commission amount was not deductible as provided in section 40(a)(i) of the Act. The CIT(A) concurred with the Assessing Officer and held that the assessee ought to have deducted tax on the sales commission remitted outside India and that in view of the default, section 40(a)(i) was to be applied and so the disallowance was in order. Aggrieved with the order of the appellate authority confirming the disallowance, the assessee has filed this appeal before the Tribunal. On behalf of the assessee, Sri G. Narayanaswamy, Chartered Accountant submitted that the Assessing Officer and the CIT(A) had erred in holding that the assessee ought to have deducted tax on the sales commission payable outside India. He explained that the foreign concern M/s. Esopelli & Co., SAS, Italy was acting as a selling agent for the assessee for canvassing orders outside India particularly in Italy and that there was no service rendered by them within the taxable territory. Drawing attention to section 195, he stated that the liability to deduct tax at source would arise only if any sum chargeable to tax under the I.T. Act was paid outside India. He relied on the decision of the Supreme Court in the case of CIT v. Toshoku Ltd. [1980] 125 ITR 525 for the contention that the non-resident acting as an agent outside India did not carry on any business operation in India. Sri G.S.D. Babu, the Departmental Representative supported the order of the CIT(A) and submitted that there was clear default on the part of the assessee in regard to deduction of tax at source as required under section 195 on the sum payable outside India and so, section 40(a)(i) was rightly applied for making the disallowance. He contended that if the assessee felt that there was no income accruing or arising to the non-resident to attract the liability under section 195, the assessee ought to have made an application before the Assessing Officer under section 195(2) for determination of the income, if any, on which tax was to be deducted. The Tribunal observed that section 40(a)(i) has application in respect of any amount chargeable under the Act which is payable outside India. The sales commission paid to the assessee could be included in his total income under section 5(2)(b) only if it is income accruing or arising or deemed to be accruing or arising to him in India. It was held that the non-resident did not carry out any operations in India to entitle them for the sale commission. The Tribunal relied on the Supreme Court decision in Toshoku Ltd. and the CBDT Circulars No. 23 and No. 786, which clarified that no tax is deductible u/s 195 and consequently the expenditure on export commission and other related charges payable to a non-resident for services rendered outside India becomes allowable expenditure. The Tribunal concluded that the AO is not correct in his view that the commission payable to the non-resident was for the services rendered in India through the resident concern M/s. Babu & Co. It is our considered view that the assessee had to pay sales commission to M/s. Esopelli for the services rendered outside India in connection with the export sales only. In the above circumstances, we reverse the finding of the CIT(A) and direct the Assessing Officer not to disallow under section 40(a)(i) the sales commission payable to the non-resident. Accordingly this ground of appeal is decided in favour of the assessee.
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