2017 (9) TMI 820 - AT - Income Tax

TDS u/s 195 - non deduction of TDS on foreign agency commission outside India for promotion of export sales outside India - P.E. in India - income accrues or arises in India - agent principal relation - Held that - Non-resident commission agents based outside India rendering services of procuring orders cannot be said to have a business connection in India and the commission payments to them cannot be said to have been either accrued or arisen in India. In view of the decisions cited above (supra), we are of the considered opinion that the assessee is not liable to deduct tax under the provisions of section 195 of the I.T. Act on account of foreign agency commission paid outside India for promotion of export sales outside India. See Kikani Exports Pvt. Ltd. (2014 (9) TMI 96 - MADRAS HIGH COURT), Faizan Shoes Pvt. Ltd. (2014 (8) TMI 170 - MADRAS HIGH COURT) and EON Technology P. Ltd. 2011 (11) TMI 20 - DELHI HIGH COURT - Decided in favour of assessee.

Summary

Issues Involved:
1. Whether the payment of foreign agency commission is subject to tax withholding under Section 195 of the I.T. Act.
2. Whether the disallowance of the foreign agency commission under Section 40(a)(i) of the I.T. Act is justified.

Detailed Analysis:

Issue 1: Tax Withholding under Section 195 of the I.T. Act

The assessee, a partnership firm engaged in the manufacturing and export of jewelry, paid a foreign agency commission without deducting tax at source as per Section 195 of the I.T. Act. The Assessing Officer (AO) contended that the commission paid to foreign agents should be subject to tax deduction under Section 195 since the income accrues or arises in India. The AO relied on decisions from the Authority for Advance Rulings (AAR) in the cases of SKF Boilers and Driers Pvt. Ltd. and Rajiv Malhotra to support this stance.

The assessee argued that the foreign agents operated outside India without any permanent establishment or business connection in India. Therefore, their income did not accrue or arise in India under Sections 5(2) and 9(1) of the I.T. Act. The assessee referred to various judicial precedents, including the decisions of the Hon'ble Supreme Court in CIT vs. Toshoku Ltd., and the Hon'ble Allahabad High Court in CIT vs. Model Exims, to assert that no tax withholding was required for payments to non-resident agents providing services outside India.

The Tribunal considered these arguments and judicial precedents, including decisions from the Hon'ble Madras High Court in CIT vs. Kikani Exports Pvt. Ltd. and CIT vs. Faizan Shoes Pvt. Ltd., as well as the Hon'ble Delhi High Court in CIT vs. EON Technology P. Ltd. The Tribunal concluded that the payments made to non-resident agents for services rendered outside India were not chargeable to tax in India. Hence, the assessee was not liable to deduct tax under Section 195 of the I.T. Act.

Issue 2: Disallowance under Section 40(a)(i) of the I.T. Act

The AO disallowed the foreign agency commission expenses under Section 40(a)(i) due to the non-deduction of tax at source. The CIT(A) upheld this disallowance, stating that the income arising from the commission had a real and intimate connection with the income accruing to the assessee in India. The CIT(A) emphasized that the right to receive the commission arose in India when the orders procured by the agents were executed.

The assessee contested this disallowance, arguing that the services rendered by the non-resident agents did not involve managerial or technical services, and thus, no tax withholding was required. The Tribunal referred to the decision of the Ahmedabad Bench in Welspun Corporation Ltd., which held that payments for services rendered by non-resident agents were not fees for technical services and had no tax implications in India.

The Tribunal also considered the Hon'ble Allahabad High Court's decision in Model Exims, which clarified that agreements with non-resident agents for procuring orders did not involve managerial services and were not subject to tax withholding. The Tribunal further noted the Hon'ble Supreme Court's decision in Toshoku Ltd., which established that commission payments to non-resident agents for services rendered outside India could not be deemed to have accrued or arisen in India.

Based on these precedents, the Tribunal concluded that the assessee was not liable to deduct tax on the foreign agency commission, and therefore, the disallowance under Section 40(a)(i) was not justified. The Tribunal set aside the order of the CIT(A) and allowed the grounds raised by the assessee.

Conclusion:

The Tribunal ruled in favor of the assessee, holding that the foreign agency commission paid for services rendered outside India was not subject to tax withholding under Section 195 of the I.T. Act. Consequently, the disallowance of the commission expenses under Section 40(a)(i) was not warranted. The appeal filed by the assessee was allowed.