2018 (11) TMI 782 - AT - Income Tax

TDS u/s 195 - commission payments made to the non-resident agents - Held that - 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 AO for order u/s 195. The assessee, for the detailed reasons set our above, did not have tax withholding liability from these payments. As held in the case of GE India Technology Centre (P.) Ltd. v. 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. Addition on account of prior period expenses - Held that - We find that in the case of Saurashtra Cement & Chemical Industries Ltd Vs CIT 1994 (10) TMI 30 - GUJARAT HIGH COURT has, inter alia, observed that Merely because an expense relates to a transaction of an earlier year it does not become a liability payable in the earlier year unless it can be said that the liability was determined and crystallized in the year in question on the basis of maintaining accounts on the mercantile basis but that is precisely what has been upheld in the impugned order. It is not the case of the revenue that the expenses have been claimed twice but the short ground of disallowance is that since the expenses pertain to an earlier year, these expenses cannot be allowed. That approach is impermissible in law. - direct the Assessing Officer to delete the impugned disallowance - decided in favour of assessee.

Summary

Issues Involved:
1. Addition on account of commission payment to non-resident agents.
2. Addition on account of prior period expenses.

Detailed Analysis:

1. Addition on account of commission payment to non-resident agents:

The primary issue was whether the commission paid to non-resident agents was taxable in India and if the assessee was liable to deduct tax at source under section 40(a)(i) of the Income Tax Act, 1961. The authorities below held that the commission paid for services rendered by non-resident agents was taxable in India, thus necessitating the deduction of tax at source. The assessee contended that the liability for commission crystallized during the year under consideration and was not liable for tax deduction under section 40(a)(i).

The Tribunal referenced a coordinate bench decision in the case of DCIT Vs. Welspun Corporation Limited, which clarified that payments to non-resident agents without a permanent establishment in India are not taxable under domestic law or respective tax treaties. The Tribunal noted that the income from such commission payments did not accrue or arise in India as the non-resident agents did not carry out any business operations in India.

The Tribunal also discussed the nature of services rendered by the agents, concluding that even if the services were technical, the payments were not for rendering technical services but for securing business orders. The Tribunal emphasized that the commission payments were entrepreneurial activities and not technical services. Consequently, the commission paid to non-resident agents did not attract tax liability in India, and the assessee was not required to deduct tax at source.

2. Addition on account of prior period expenses:

The second issue pertained to the disallowance of prior period expenses amounting to ?1,63,623, which included expenses towards the purchase of stores items, advertisement, and rent. The Assessing Officer disallowed these expenses on the ground that they did not pertain to the period under consideration. The CIT(A) upheld this disallowance.

The Tribunal referred to the jurisdictional High Court's decision in Saurashtra Cement & Chemical Industries Ltd Vs CIT, which stated that merely because an expense relates to a transaction of an earlier year, it does not become a liability payable in the earlier year unless the liability was determined and crystallized in the year in question on a mercantile basis. The Tribunal found that the expenses were not claimed twice and that the disallowance was solely based on the timing of the expenses. Thus, the Tribunal held that the approach of disallowing the expenses was impermissible in law and directed the Assessing Officer to delete the disallowance.

Conclusion:

The Tribunal allowed the appeal by the assessee, deleting the disallowance of ?12,09,143 on account of commission payments to non-resident agents and ?1,63,623 on account of prior period expenses. The judgment emphasized the principles of taxability under domestic law and tax treaties, and the proper accounting treatment of expenses under the mercantile system.