2017 (11) TMI 562 - AT - Income Tax

TDS u/s 195 - default under section 201(1) & 201(1A) of the Act for not deducting tax while making remittance to non-residents - withholding of tax - PE in India - commission paid to export commission agents - Held that - The issue in question is covered, in favour of the assessee, by the decision of the co-ordinate bench in the case of DCIT vs. Welspun Corp Ltd 2017 (1) TMI 1084 - ITAT AHMEDABAD Commission payments made to the non resident agents did not have any taxability in India, even under the provisions of the domestic law i.e. Section 9. Once we come to the conclusion that the income embedded in these payments did not have any tax implications in India, no fault can be found in not deducting tax at source from these payments or, for that purpose, even not approaching the Assessing Officer for order under section 195. In our considered view, the assessee, for the detailed reasons set our above, did not have tax withholding liability from these payments. As held by Hon ble Supreme Court in the case of GE India Technology Centre Pvt Ltd Vs CIT 2010 (9) TMI 7 - SUPREME COURT OF INDIA payer is bound to withhold tax from the foreign remittance only if the sum paid is assessable to tax in India. The assessee cannot, therefore, be faulted for not approaching the Assessing Officer under section 195 either. As regards the withdrawal of the CBDT circular holding that the commission payments to non resident agents are not taxable in India, nothing really turns on the circular, as de hors the aforesaid circular, we have adjudicated upon the taxability of the commission agent s income in India in terms of the provisions of the Income Tax Act as also the relevant tax treaty provisions.

Summary

Issues Involved:
1. Invocation of Section 263 of the Income Tax Act, 1961 by the Principal Commissioner of Income Tax (CIT).
2. Setting aside the assessment under Section 143(3) and directing a fresh assessment.
3. Allegation of improper enquiry and verification by the Assessing Officer (AO).
4. Taxability of commission paid to non-residents and the obligation to withhold tax under Section 195.
5. Disallowance under Section 40(a)(i) for non-deduction of TDS on commission payments to non-residents.

Detailed Analysis:

1. Invocation of Section 263 of the Income Tax Act, 1961:
The CIT invoked Section 263, claiming that the conditions for such extraordinary jurisdiction were satisfied. The CIT argued that the AO did not conduct a proper enquiry and verification regarding the commission payments to non-residents, which should have been subject to TDS under Section 195.

2. Setting Aside the Assessment under Section 143(3):
The CIT set aside the assessment made under Section 143(3), directing the AO to frame a fresh assessment. This was based on the observation that the AO failed to properly examine the issue of commission payments to non-residents.

3. Allegation of Improper Enquiry and Verification:
The CIT contended that the AO did not conduct a thorough enquiry and verification during the assessment process. The AO had examined the issue at length and called for various details, but the CIT believed this was insufficient.

4. Taxability of Commission Paid to Non-Residents:
The CIT held that the commission of ?98,27,174/- paid to non-residents for services rendered outside India was chargeable to tax in India, necessitating the withholding of tax under Section 195. The CIT's stance was that the provisions of Section 195(1) were applicable, even during the currency of Circular No. 7 dated 22.10.2009.

5. Disallowance under Section 40(a)(i):
The CIT concluded that the commission payments should be disallowed under Section 40(a)(i) due to the non-deduction of TDS as required by Section 195.

Tribunal's Findings:

On Invocation of Section 263:
The Tribunal found that the issue was covered in favor of the assessee by the decision in the case of DCIT vs. Welspun Corp Ltd [(2017) 55 ITR (Trib) 405 (Ahd)]. The Tribunal observed that the CIT's invocation of Section 263 was not justified as the conditions for such jurisdiction were not met.

On Setting Aside the Assessment:
The Tribunal quashed the CIT's order, stating that the AO had conducted a proper enquiry and verification. The Tribunal noted that the AO had examined the issue at length and had called for various details during the assessment process.

On Allegation of Improper Enquiry and Verification:
The Tribunal disagreed with the CIT's observation, emphasizing that the AO had conducted a thorough enquiry and verification. The Tribunal highlighted that the AO had examined the issue in detail and had called for various details during the assessment process.

On Taxability of Commission Paid to Non-Residents:
The Tribunal referred to the scheme of taxability in India for non-residents, as explained in the Welspun Corp Ltd case. It was noted that since no part of the operations of the recipient non-residents was carried out in India, no income accrued to these non-residents in India. The Tribunal concluded that the commission payments were not chargeable to tax in India, and therefore, there was no liability to withhold tax under Section 195.

On Disallowance under Section 40(a)(i):
The Tribunal held that the disallowance under Section 40(a)(i) was not warranted. It was concluded that the commission payments to non-residents did not attract taxability in India, and hence, there was no requirement for TDS deduction under Section 195.

Conclusion:
The Tribunal allowed the appeal, quashing the CIT's order under Section 263. The Tribunal upheld that the commission payments made to non-residents were not taxable in India, and there was no obligation to withhold tax under Section 195. Consequently, the disallowance under Section 40(a)(i) was also not justified. The decision was pronounced in the open court on the 25th day of September, 2017.