2016 (11) TMI 1150 - AT - Income Tax

TDS u/s 195 - Non deduction of tds on overseas commission - Held that - It is not in dispute that the assessee paid the commission for the services rendered outside India which is not taxable in India. Therefore, the assessee is not under obligation to deduct the TDS u/s.40(a)(ia) of the Act. Accordingly this issue is decided in favour of the assessee.

Issues Involved:
1. Disallowance of deduction for overseas commission paid to non-resident foreign sales agents under Section 40(a)(i) of the Income Tax Act, 1961.
2. Disallowance of deduction for freight charges paid to non-resident shipping companies or their agents under Section 40(a)(ia) of the Income Tax Act, 1961.

Issue-wise Analysis:

Issue 1: Disallowance of Deduction for Overseas Commission
The assessee filed appeals against the disallowance of deductions for overseas commissions paid to non-resident foreign sales agents for the Assessment Years 2007-08, 2008-09, and 2009-10. The primary contention was that the commission paid to foreign agents for services rendered outside India should not attract tax deduction at source (TDS) under Section 40(a)(i) of the Income Tax Act, 1961.

The assessee argued that the income paid to non-resident agents was not liable to be assessed in India, as the services were rendered outside India and no part of the income arose in India. The assessee relied on several judicial precedents, including Gujarat Reclaim & Rubber Product Ltd. and Armayesh Global, which held that payments to non-resident agents for services rendered outside India are not chargeable to tax in India and thus do not necessitate TDS.

The Assessing Officer (AO) had disallowed the commission on the grounds that the services were managerial in nature and included as fees for technical services, thus requiring TDS. However, the Tribunal noted that the services rendered by the agents were purely for marketing and coordination, and not managerial or technical. The Tribunal relied on CBDT Circular No. 786 dated 07.02.2009, which clarified that commission payments to non-resident agents for services rendered outside India are not taxable in India and thus do not attract TDS under Section 195.

The Tribunal concluded that the commission paid by the assessee for services rendered outside India was not taxable in India, and therefore, the assessee was not obligated to deduct TDS under Section 40(a)(i). The Tribunal set aside the orders of the CIT(A) and directed the AO to delete the disallowance for all the assessment years in question.

Issue 2: Disallowance of Deduction for Freight Charges
For the Assessment Year 2008-09, the assessee also contested the disallowance of deduction for freight charges paid to non-resident shipping companies and their agents under Section 40(a)(ia). The assessee argued that no TDS was deductible based on declarations from the shipping companies, relying on CBDT Circular No. 723 dated 19.09.1995, which stated that payments to non-resident shipping companies assessed under Section 172 do not require TDS.

The Tribunal noted that the assessee had relied on the circular and declarations from the shipping companies to substantiate that no TDS was required. The Tribunal found the assessee's contention valid and directed the AO to allow the deduction of freight charges.

Conclusion:
The Tribunal allowed all the appeals filed by the assessee, setting aside the disallowances made by the CIT(A) for overseas commission and freight charges. The Tribunal emphasized the applicability of judicial precedents and CBDT circulars, which clarified that payments for services rendered outside India by non-resident agents and shipping companies do not attract TDS under the relevant sections of the Income Tax Act.

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