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2012 (10) TMI 431 - AT - Income TaxCommission paid to non resident agent - Assessing Officer found that the assessee has paid an amount of Rs.80, 50, 703/- to non resident agents without deducting tax at source. The AO therefore disallowed the entire amount u/s 40(a)(i) and added it to the total income.The CIT (A) s order was challenged in appeal before the ITAT. Held that - The reasoning of the AO that since the DDs have been purchased from banks in India and have been sent through courier the payment of commission deemed to have been paid in India is also not acceptable. - the AO has failed to bring any material on record to show that the payments were made to the non resident agents in India at the request of the foreign agents. Non resident agents did not carry out any business operations in India and has acted as selling agents of the assessee outside India. Therefore the commission earned by them for services rendered by them outside India cannot be considered as income chargeable to tax in India as non resident do not have any permanent establishment in India Therefore when the commission paid to the non residents are not chargeable to tax under the provisions of the Act no deduction of tax is required to be made u/s 195(1) of the Act and disallowance made u/s 40(a)(i)by Assessing officer is not sustainable - against revenue.
Issues Involved:
1. Deletion of addition towards commission on export sales. 2. Applicability of Section 195 of IT Act for tax deduction at source. 3. Applicability of Section 5(2)(a) regarding income deemed to have been received in India. Detailed Analysis: Issue 1: Deletion of Addition towards Commission on Export Sales The Revenue challenged the deletion of Rs. 80,50,703/- towards commission on export sales by the CIT (A). The AO had disallowed this amount under Section 40(a)(i) because the assessee failed to deduct tax at source. The CIT (A) relied on a previous order in a similar case (M/s Newland Laboratories Limited) and deleted the addition. The ITAT had earlier remanded the issue back to the AO to examine the agreements and intentions of the parties involved. Upon reassessment, the AO maintained the disallowance, asserting that the payment of commission was taxable in India based on the mode of payment (DDs purchased in Hyderabad and sent via courier). Issue 2: Applicability of Section 195 of IT Act for Tax Deduction at Source The core issue was whether the commission paid to non-resident agents was chargeable to tax under the Act, necessitating tax deduction at source under Section 195(1). The assessee argued that the non-resident agents did not conduct business operations in India nor had any permanent establishment in India, and the commission was for services rendered outside India. The CIT (A) agreed, noting that the agreements did not stipulate the mode of payment and there was no evidence that the non-resident agents requested payments to be made in India. The CIT (A) relied on decisions from the ITAT, Hyderabad Bench, and the Supreme Court ruling in CIT vs. Toshoku Ltd. (125 ITR 525), which clarified that income earned by non-resident agents for services rendered outside India is not chargeable to tax in India. Issue 3: Applicability of Section 5(2)(a) regarding Income Deemed to have been Received in India The AO argued that the commission payments were deemed to have been received in India because the DDs were purchased in Hyderabad and sent through courier, suggesting an oral request from the foreign agents. The CIT (A) rejected this reasoning, stating that there was no evidence in the agreements or on record to support this claim. The CIT (A) concluded that the payments were not received in India by the non-resident agents or anyone on their behalf. The CIT (A) emphasized that the AO failed to establish that the non-resident agents had a permanent establishment or business connection in India, which would have made the commission payments taxable under Section 5(2)(a). Conclusion: The ITAT upheld the CIT (A)'s decision, concluding that the commission paid to non-resident agents was not chargeable to tax in India. Therefore, the requirement to deduct tax at source under Section 195(1) did not arise, and the disallowance under Section 40(a)(i) was not justified. The appeal by the Revenue was dismissed, affirming that no disallowance could be made since the commission payments were not taxable in India. The ITAT also noted that the AO did not provide any material evidence to support the claim that the payments were made at the request of the foreign agents or received in India.
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