2008 (9) TMI 596 - AT - Income Tax

Disallowance - Under section 40(a)(i) - Commission - deduct the tax at source under section 195 - No income accrued to the assessee in India inasmuch as the services were rendered outside India and the payment was made outside India - It was also submitted that a non-resident had no establishment in India and therefore, no tax was payable in view of the Indo-UK Treaty - The learned CIT(A) accepted the contention of the assessee and consequently deleted the disallowance made by the Assessing Officer - Decided in favour of assessee.

Summary

Issues: Disallowance of commission payment under section 40(a)(i) of the I.T. Act, 1961.

The judgment deals with an appeal against the disallowance of a commission payment made by the assessee to a non-resident company, M/s. Bonas & Co., under section 40(a)(i) of the Income Tax Act, 1961. The assessee, engaged in the export of cut & polished diamonds, imported rough diamonds from Diamond Trading Company Ltd., U.K. through the services of M/s. Bonas & Co., U.K. The payment of Rs. 1,47,37,806 as commission was not subjected to tax deduction at source. The Assessing Officer contended that tax should have been deducted under section 195 of the Act, leading to the disallowance of the commission amount in the assessee's income calculation.

The primary argument before the CIT(A) was that since the services were rendered and payment made outside India, no income accrued to the non-resident company in India. Additionally, it was emphasized that the non-resident had no establishment in India, and therefore, no tax liability existed under the Indo-UK Treaty. The CIT(A) accepted these contentions and ruled in favor of the assessee, overturning the disallowance. The revenue, dissatisfied with this decision, appealed to the Tribunal.

During the proceedings, it was established that the services were indeed rendered and payment made outside India, with no establishment of the non-resident in India. Based on these facts, the Tribunal concurred that no income accrued to the assessee in India. Even if income had accrued, it would fall under 'Business Profits' as per the Indo-UK Treaty and would not be taxable in India without a permanent establishment in the country. Consequently, the Tribunal upheld the CIT(A)'s decision, dismissing the revenue's appeal.

Therefore, the Tribunal dismissed the appeal filed by the revenue, affirming the legal findings of the CIT(A) that the commission payment to the non-resident company was not subject to taxation in India due to the absence of income accrual and a permanent establishment as per the provisions of the Indo-UK Treaty.