2012 (5) TMI 124 - AT - Income Tax

Payment to Overseas Commission agent - whether it is simply commission, or it is in the nature of fees for technical services ? - liability on the assessee to deduct withholding tax Held that - The agreement between the assessee and the Non Resident is only for rendering services which cannot be considered as technical services - as there is no PE to the said non - resident in India, the amount does not accrue or arise in India - as there is no need for deducting the amount under section 195, there is no violation of provisions of section 195 and accordingly the same cannot be disallowed under section 40(a)(ia)- if the fee payable is on source of income outside India, the same is not taxable in India - Since there is no evidence that the non-resident has rendered any managerial services to assessee and the agreement indicates only services were provided for agency on commission basis, the findings of AO and CIT(A) are to be rejected - reliance on the CBDT circular 786 dated 7 February 2000 that where the non-resident agent operates outside the country, no part of his income arises in India and no tax is therefore deductible under section 195 - in favour of assessee.

Issues Involved:
1. Nature of services provided by Indijack Ltd. and whether they qualify as managerial/technical services.
2. Obligation of the assessee to deduct withholding tax under Section 195.
3. Applicability of Section 40(a)(i) for disallowance due to non-deduction of tax at source.
4. Relevance of CBDT Circulars and Double Taxation Avoidance Agreements (DTAA).

Detailed Analysis:

1. Nature of Services Provided by Indijack Ltd.
The Assessing Officer (AO) determined that the services provided by Indijack Ltd. were managerial in nature, involving activities such as procuring export orders, providing confirmed export orders, and ensuring timely payments. The AO concluded that these services went beyond mere commission and were managerial services, thus falling under "fees for technical services" as per Explanation 2 to Section 9(1)(vii) of the Income Tax Act.

The CIT(A) supported this view, citing the Agency Agreement which detailed the responsibilities of Indijack Ltd., including negotiating contracts, visiting customers, and assisting in collecting payments. The CIT(A) referenced the case of Wallace Pharmaceuticals Pvt. Ltd. to assert that consultancy services promoting sales are deemed to be income arising in India and subject to TDS under Section 195.

However, the ITAT "A" Bench found that the services rendered by Indijack Ltd. were not managerial or technical but were purely commission-based for promoting the assessee's products abroad. The ITAT concluded that since no services were rendered in India, the commission paid could not be deemed income chargeable in India under the Income Tax Act.

2. Obligation to Deduct Withholding Tax under Section 195
The AO and CIT(A) held that the assessee was required to deduct tax at source under Section 195 for payments made to Indijack Ltd., as these were considered fees for technical services. The AO cited various judgments and provisions, including Section 40(a)(i) and Section 9(1)(vii), to support this view.

The assessee argued that the commission paid to Indijack Ltd. did not constitute income chargeable to tax in India, as the services were rendered outside India. The assessee relied on the Supreme Court decision in CIT v. Toshoku Ltd., which held that commission earned by a non-resident for services rendered outside India cannot be deemed income accruing in India.

The ITAT "A" Bench agreed with the assessee, stating that since the services were rendered outside India and the non-resident agent had no permanent establishment in India, the commission paid was not chargeable to tax in India. Therefore, there was no obligation to deduct tax at source under Section 195.

3. Applicability of Section 40(a)(i)
The AO disallowed the commission paid under Section 40(a)(i) due to the non-deduction of tax at source. The CIT(A) upheld this disallowance, stating that the payment to Indijack Ltd. was a composite payment including fees for technical services, which is taxable in India.

The ITAT "A" Bench, however, found that the commission paid was not for technical or managerial services but for promoting the assessee's products abroad. Since the services were rendered outside India and the income was not chargeable to tax in India, the provisions of Section 40(a)(i) did not apply. The ITAT also noted that the CBDT Circular 786, which clarified that no TDS is required on export commission paid to non-residents for services rendered outside India, was applicable for the assessment year in question.

4. Relevance of CBDT Circulars and DTAA
The AO and CIT(A) argued that the CBDT Circular 23 relied upon by the assessee had been withdrawn, and the provisions of Section 9(1)(vii) as amended by the Finance Act, 2007, applied retrospectively. They also did not consider the provisions of the DTAA between India and the UK.

The ITAT "A" Bench emphasized that the CBDT Circular 786, which was applicable for the assessment year in question, clarified that no TDS is required on export commission paid to non-residents for services rendered outside India. The ITAT also noted that the DTAA between India and the UK did not include managerial services under "fees for technical services," and since the non-resident agent had no permanent establishment in India, the income was not taxable in India.

Conclusion:
The ITAT "A" Bench allowed the assessee's appeal, concluding that the services rendered by Indijack Ltd. were not managerial or technical but purely commission-based. Since the services were rendered outside India and the non-resident agent had no permanent establishment in India, the commission paid was not chargeable to tax in India. Consequently, there was no obligation to deduct tax at source under Section 195, and the provisions of Section 40(a)(i) did not apply. The ITAT also upheld the applicability of CBDT Circular 786 for the assessment year in question.

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