2019 (1) TMI 1453 - AT - Income Tax

TDS u/s 195 - commission paid to the Foreign Agents u/s 40(a)(ia) - fees for technical services - non-resident rendering services outside India - PE in India - Held that - Since the non-resident agents do not have any permanent establishment in India no part of the commission income of those agents can be said to have been accrued or arise in India. Further that the commission payments to non-resident agents also cannot be as regarded fees for technical services as defined in explanation 2 of Section 9(vii) as the commission payment is not for rendering any managerial, technical or consultancy services. It is well settled principle of law flowing from the judgment passed in the case of CIT vs. Toshoku Ltd., 1980 (8) TMI 2 - SUPREME COURT that the non-resident since rendering services outside India, the commission earned by such non-resident for acting as an agent for Indian exporter would not accrue in India. In the case in hand the foreign agents are not residents of India and thus squarely covered by the said judgment passed by the Hon ble Apex Court. Further that similar commission paid in earlier years by the assessee to the foreign agents in the similar set of facts and circumstances no disallowance made by the authorities below and therefore disallowance made by the Learned AO is not justified. In fact the order impugned clarified each and every aspect of the matter as discussed above does not call for any interference and therefore in the absence of any infirmity we confirm the same. Thus, revenue s ground of appeal is dismissed. Disallowance made u/s 14A - Held that - no direct or indirect expenditure has been incurred by the firm in respect of investment in capital with partnership firm. In the absence of any expenditure incurred and debited to profit and loss account of the company in relation to investment in capital in partnership firm application of Rule 8D(iii) is not permissible and therefore no disallowance of expenditure is required to be made. The investment in partnership was made out of the own funds as it is clearly evident from the record before us; no interest bearing borrowed fund were used for making these investment. The judgment relied upon by the Learned AR in this respect passed by the Jurisdictional High Court in the case of Corrtech Energy Pvt. Ltd. 2014 (3) TMI 856 - GUJARAT HIGH COURT which has held that in a case where there is no income which is not chargeable to tax, provision of Section 14A of the Act will not be applied is rightly applied to the instant case. - decided in favour of assessee

Summary

Issues:
1. Disallowance of commission paid to foreign agents under section 40(a)(i) of the Income Tax Act.
2. Disallowance made under section 14A of the Income Tax Act.

Analysis:

Issue 1: Disallowance of Commission Paid to Foreign Agents under Section 40(a)(i)
The appeal was filed by the revenue challenging the deletion of disallowance of commission paid to foreign agents under section 40(a)(i) amounting to ?43,57,703. The assessee contended that the commission paid to non-resident foreign agents was not chargeable under the Income Tax Act as income of the payee. The assessee relied on the judgment of G.E. India Technology Centre Pvt. Ltd.-vs-CIT, 327 ITR 456, stating that Section 195 of the Act applies only when the amount paid to a non-resident is chargeable under the Income Tax Act as income of the payee. The assessee argued that the commission paid to foreign agents for services rendered outside India for procurement of sales orders was not taxable in India. The Commissioner of Income Tax (Appeals) upheld the assessee's position and deleted the disallowance. The tribunal confirmed the deletion, stating that the commission income did not accrue or arise in India as the foreign agents did not have a permanent establishment in India. The tribunal also noted that the commission payments did not fall under fees for technical services as defined in the Income Tax Act.

Issue 2: Disallowance under Section 14A of the Income Tax Act
The revenue challenged the deletion of disallowance made under section 14A of the Income Tax Act amounting to ?26,64,827. The assessee argued that no income claimed as exempt income formed part of the total income, making Section 14A inapplicable. The tribunal observed that the investments in a partnership firm were made using own funds without utilizing interest-bearing borrowed funds. The tribunal noted that no direct or indirect expenditure was incurred by the firm in relation to the investment in the partnership firm. Relying on the judgment in the case of CIT vs. Corrtech Energy Ltd., the tribunal concluded that since no exempt income was claimed, Section 14A did not apply. The tribunal upheld the deletion of the disallowance, finding no infirmity in the order passed by the Commissioner of Income Tax (Appeals).

In conclusion, the tribunal dismissed the appeal, confirming the decisions of the Commissioner of Income Tax (Appeals) regarding both issues.