2015 (3) TMI 719 - HC - Income Tax

Non deduction of tds - payments made by the assessee to the non-residents - whether the relationship between the appellant and the agents is contractual and entire service is provided outside India and duly compensated by way of commission payment which is also paid outside India, thus no TDS is to be deducted? - Held that - The facts of the present case are akin to the facts of the decision in Toshoku Ltd.'s case 1980 (8) TMI 2 - SUPREME Court wherein held that the non-resident assessees did not carry on any business operations in the taxable territories. They acted as selling agents outside India. The receipt in India of the sale proceeds of tobacco remitted or caused to be remitted by the purchasers from abroad does not amount to an operation carried out by the assessees in India as contemplated by clause (a) of the Explanation to section 9(1)(i) of the Act. The commission amounts which were earned by the non-resident assessees for services rendered outside India cannot, therefore, be deemed to be incomes which have either accrued or arisen in India.In the instant case the assessee engaged the services of non-resident agent to procure export orders and paid commission. That apart, the Commissioner of Income-tax (Appeals) as well as the Tribunal have correctly applied the principle laid down in GE India Technology Centre (P.) Ltd.'s case, 2010 (9) TMI 7 - SUPREME COURT OF INDIA to hold that the assessee is not liable to deduct tax at source when the non-resident agent provides services outside India on payment of commission. - Thus the services rendered by the non-resident agent can at best be called as a service for completion of the export commitment and would not fall within the definition of fees for technical services, we are the firm view that section 9 of the Act is not applicable to the case on hand and, consequently, section 195 of the Act does not come into play. Also see Faizen Shoes case 2014 (8) TMI 170 - MADRAS HIGH COURT - Decided in favour of assessee.

Summary

Issues:
1) Interpretation of Sec. 195 and Sec. 40 (1) (ii) regarding payments made to non-residents.
2) Application of Sec. 9 (i) (vii) and explanation to Sec. 9 (2) in the context of technical services provided by agents.
3) Reliance on precedent and distinction in the case of Commissioner of Income Tax Vs Faizan Shoes Pvt. Ltd.

Issue 1:
The appellant contested the order of the Tribunal, arguing that payments to non-residents attract Sec. 195 and Sec. 40 (1) (ii). The Assessing Officer disallowed the expenditure claimed by the assessee for commission payments to foreign agents due to non-deduction of TDS under Sec. 195. The CIT (Appeals) allowed the appeal, stating that the commission paid did not constitute income in the hands of non-resident agents and thus did not fall under Sec. 195. The High Court upheld this view, emphasizing that the commission was paid abroad for services provided outside India, and therefore, the income did not accrue in India, leading to the dismissal of the appeal.

Issue 2:
Regarding the application of Sec. 9 (i) (vii) and the explanation to Sec. 9 (2), the High Court analyzed the nature of services provided by the non-resident agent. It was concluded that the commission paid for procuring export orders did not qualify as "fees for technical services." The Court highlighted that the services were related to export commitments and did not involve technical services for running the business in India. The Court also referred to relevant judicial precedents and the substitution of the Explanation to Sec. 9 (2) by the Finance Act, 2010, to support its decision that the commission payment did not fall under taxable categories specified in the Act.

Issue 3:
The Tribunal relied on the decision in the case of Commissioner of Income Tax Vs Faizan Shoes Pvt. Ltd., which the appellant contested, arguing that the facts were distinguishable. However, the High Court found that the facts in both cases were similar, and the principles established in the Faizan Shoes case were applicable to the present case. The Court further cited the decision in GE India Technology Centre (P.) Ltd.'s case to support the conclusion that the assessee was not liable to deduct tax at source for services provided outside India. Ultimately, the High Court confirmed the Tribunal's decision, stating that no substantial question of law arose for consideration, and dismissed the appeal.