2018 (5) TMI 1182 - HC - Income Tax

TDS u/s 195 - commission payment for the business activity accruing and airing in India - obligation on the part of the assessee to deduct tax at source in relation to the commission payment made to its foreign Commission Agent - Held that - Explanation inserted with retrospective effect provides that obligation to comply with subsection 1 of Section 195 would extend to any person resident or non-resident, whether or not non-resident person has a residence or place of business or business connections in India or any other persons in any manner whatsoever in India Once the conclusion is arrived that such payment did not entail tax liability of the payee under the Act, as held by the Supreme Court in the case of GE India Technology Centre P. Limited 2010 (9) TMI 7 - SUPREME COURT OF INDIA , sub-section 1 of Section 195 of the Act would not apply. The fundamental principle of deducting tax at source in connection with payment only, where the sum is chargeable to tax under the Act, still continues to hold the field. In the present case, the Revenue has not seven seriously contended that the payment to foreign commission agent was not taxable in India. - Decided against revenue

Summary

Issues:
1. Obligation to deduct tax at source on commission payment to a foreign Commission Agent.
2. Interpretation of Section 40(a)(ia) of the Income-tax Act, 1961.
3. Applicability of Section 195 in cases of payment to non-residents.
4. Impact of judicial pronouncements on tax deduction obligations.
5. Relevance of Explanation 2 to sub-section (1) of Section 195 in determining tax liability.

Analysis:
1. The primary issue in this case revolves around the obligation of the respondent-assessee to deduct tax at source concerning the commission payment made to a foreign Commission Agent. The Assessing Officer disallowed the commission expenditure due to the failure to deduct tax at source, leading to an appeal before the Appellate Commissioner.

2. The Appellate Commissioner, considering the facts, circulars, and legal position, held that the commission paid to the non-resident agent, whose income was not taxable in India, did not require TDS deduction under Section 40(a)(ia) of the Income-tax Act, 1961. Consequently, the disallowances made by the Assessing Officer were deleted.

3. The Revenue then appealed to the Tribunal, which dismissed the appeal. The Tribunal's decision was based on Section 195, which mandates tax deduction for payments to non-residents. However, the Tribunal found that the commission paid to non-residents for services rendered abroad did not attract TDS liability since the agents had no business operations in India.

4. The Tribunal's judgment cited the Supreme Court's ruling in the case of GE India Technology Centre P. Limited vs. Commissioner of Income-Tax, emphasizing that tax deduction is only required when the payment is chargeable to tax under the Act. The Tribunal concluded that the commission paid to non-residents for services rendered abroad did not fall under the purview of Section 40(a)(ia) of the Act.

5. The Tribunal's decision was further supported by the insertion of Explanation 2 to sub-section (1) of Section 195, clarifying the scope of tax deduction obligations for residents and non-residents. However, the Tribunal held that once it was established that the payment to the foreign commission agent was not taxable in India, the provisions of Section 195 did not apply, reaffirming the principle of deducting tax at source only when the sum is chargeable to tax under the Act.

In conclusion, the Tribunal upheld the order of the CIT (A) based on the interpretation of relevant tax provisions, judicial pronouncements, and the specific circumstances of the case, ultimately dismissing the Tax Appeal.