2019 (5) TMI 530 - AT - Income Tax

Addition u/s 40(a)(i) - TDS u/s 195 - sale commission paid to the non-residents for the services provided outside India - payment of 'Fee for Technical Services' (FTS) or interest on royalty, - proof of make available any technical knowledge, experience, skill, know-how or processes or consists of the development and transfer of technical plan or a technical design - Permanent Establishment in India or not? - India- Belgium India USA DTAA - HELD THAT - On application of the settled law to the facts involved in this matter, the irresistible inference that flows is that the commission received by the foreign sales agents is not taxable in India and consequently, the assessee is not under any obligation to deduct TDS, and, therefore, Section 195 has no application to the facts of the case and consequently the disallowance made in this matter cannot be sustained As represented by the assessee that an affidavit showing that neither the assessee nor any of its directors/associated enterprises had any interest in the ownership or management of the agent namely M/s Cee-Jan Beevers and/or his associated enterprises namely M/s Sahasra Europe and the fact that neither he nor his enterprises had Permanent Establishment (PE) in India. This assertion of the assessee was accepted by the learned Assessing Officer in these three years and also was acted upon.M/s Cee-Jan Beevers is a non-resident Indian and resident of Belgium whereas M/s MK group LLC is a resident of USA. In either case the payment of commission would not be 'Fee for Technical Services' (FTS) since such services did not make available any technical knowledge, experience, skill, know-how or processes or consists of the development and transfer of technical plan or a technical design. We find that the services rendered by two foreign entities are outside India and in respect of the sales effected by them, and at the same time neither of these entities had any permanent establishment in India nor does the assessee or its directors/associated enterprises had any interest in the ownership or management of these entities more particularly M/s Sahasra Europe. We, therefore, allow the grounds of appeal of the assessee.

Issues Involved:
1. Disallowance of commission expenses under Section 40(a)(i) of the Income-tax Act, 1961.
2. Classification of payments as 'Fee for Technical Services' (FTS) under Section 9(1)(vii) of the Income-tax Act.
3. Obligation to deduct tax at source under Section 195 of the Income-tax Act.
4. Permanent Establishment (PE) of non-resident agents in India.
5. Applicability of Double Taxation Avoidance Agreements (DTAA).

Issue-wise Detailed Analysis:

1. Disallowance of Commission Expenses under Section 40(a)(i):
The assessee, engaged in the business of importing and exporting electronic goods, paid a commission to foreign agents. The Assessing Officer (AO) disallowed the commission expenses of ?98,27,357/- under Section 40(a)(i) for non-deduction of tax at source. The Commissioner of Income-tax (Appeals) [CIT(A)] upheld the disallowance, treating the payments as managerial/technical services under Section 9(1)(vii). The ITAT overturned this, stating the commission paid to foreign agents for services rendered outside India was not taxable in India, and hence, Section 195 did not apply.

2. Classification of Payments as 'Fee for Technical Services' (FTS):
The AO classified the commission payments as FTS, arguing they fell under Section 9(1)(vii) and were thus taxable in India. The CIT(A) supported this view, but the ITAT disagreed, referencing the Hon'ble Apex Court's decision in GE India Technology Centre Private Limited vs. CIT, which clarified that TDS obligations arise only when the income is chargeable to tax in India. The ITAT found that the services provided by the foreign agents did not qualify as technical services under the Act.

3. Obligation to Deduct Tax at Source under Section 195:
The AO and CIT(A) contended that the assessee failed to comply with Section 195 for withholding tax on payments to non-residents. However, the ITAT noted that the payments were for services rendered outside India by non-residents without a PE in India. Citing precedents like CIT vs. EON Technology (P) Ltd and DCIT vs. Divi's Laboratories Ltd, the ITAT concluded that the assessee was not liable to deduct TDS, as the income was not deemed to accrue or arise in India.

4. Permanent Establishment (PE) of Non-resident Agents in India:
The AO initially disallowed the commission, suspecting the agents had a PE in India. However, upon remand for the assessment year 2007-08, the AO did not establish the existence of a PE. The ITAT found no evidence of a PE for the agents, M/s Cee-Jan Beevers and M/s MK Group LLC, in subsequent assessments. The ITAT emphasized that without a PE, the commission payments were not taxable in India.

5. Applicability of Double Taxation Avoidance Agreements (DTAA):
The ITAT considered the DTAA between India and Belgium and India and the USA. It concluded that the commission payments did not constitute FTS under the DTAA, as the services did not "make available" technical knowledge or skills. The ITAT noted that the agents did not have any interest in the ownership or management of the assessee's business, reinforcing the non-taxability of the commission payments in India.

Conclusion:
The ITAT allowed the appeals for both assessment years, holding that the commission payments to foreign agents were not taxable in India, the assessee was not required to deduct TDS under Section 195, and the disallowance under Section 40(a)(i) was not justified. The ITAT's decision was based on the absence of a PE, the nature of services rendered, and the applicability of DTAA provisions.

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