2020 (8) TMI 672 - AT - Income Tax

TDS u/s 195 - Commission paid to M/s. Taiyo Enterprises Inc. (NRI) - chargeable to tax in India - Existence of PE in India - HELD THAT - There is not an iota of evidence on file as to what type of managerial, technical or consultancy services have been rendered by TEI to the assessee company for installation or successful commissioning of cold rolling mill. There is also not an iota of evidence on file if TEI was having any such technical expertise and skills, as its functional profile is not on record nor claimed to have perused by AO/CIT(A), for installation and successful commissioning of cold rolling mill (turnkey project). When we examine clause 3 of the MOU it is categoric enough to explain that all the technical discussion shall be held by the first party (assessee company) directly with the prospective buyer. In case of any problem relating to getting of the order, the first party shall inform the same in writing to the second party. So, the limited role has been assigned to TEI as per MOU to introduce the prospective buyer for getting order for sale of the product of the assessee company. When undisputedly TEI is not having any Permanent Establishment (PE) in India the income of TEI received as commission from assessee company was not chargeable to tax in India as the same was neither accrued in India nor received in India and as such was not required to deduct tax at source u/s 195 of the Act. So the question framed is answered in favour of assessee as the payment made by assessee company to TEI is commission payment and not a fee for technical services . What has been discussed above, we are of the considered view that the AO as well as ld. CIT (A) have merely made addition on the basis of conjectures and surmises because no evidence whatsoever has been brought on record if TEI was having any managerial or technical expertise to provide technical services to the assessee company apart from procuring orders for the assessee company on commission basis as per MOU. So, the AO/ld. CIT (A) have erred in making disallowance / enhancing the disallowance u/s 40(a)(i)of entire commission which is not sustainable in the eyes of law, hence ordered to be deleted. Appeal filed by the assessee stands allowed.

Summary

Issues Involved:
1. Disallowance of commission paid to a non-resident company under Section 195 of the Income Tax Act.
2. Enhancement of disallowance by the CIT(A).
3. Charging of interest under Sections 234B and 234C of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Disallowance of Commission Paid to Non-Resident Company:
The primary issue revolves around the disallowance of ?39,70,224, which is 30% of ?1,32,34,080 paid as commission to M/s. Taiyo Enterprises Inc. (TEI), a non-resident company, without deducting tax at source as required under Section 195 of the Income Tax Act. The Assessing Officer (AO) made this addition on the grounds that tax was not deducted at source on the payment made to the non-resident company. The assessee company, engaged in manufacturing and trading of panels and cold rolling mills, availed services from TEI for procuring orders from Mabati Rolling Mills, Kenya, and paid a commission of 6% amounting to $34,90,000.

2. Enhancement of Disallowance by CIT(A):
The Commissioner of Income Tax (Appeals) [CIT(A)] not only upheld the AO's disallowance but also enhanced it by disallowing the entire commission amount of ?1,32,34,080 under Section 40(a)(i) of the Act. The CIT(A) observed that the commission receipts in the hands of TEI should be treated as "fee for technical services" under Section 9(1)(vii) of the Act, read with Explanation 2, and thus, subject to tax deduction at source.

3. Charging of Interest under Sections 234B and 234C:
The assessee also contested the CIT(A)'s decision not to reverse the AO's action of charging interest under Sections 234B and 234C of the Income Tax Act, which pertains to interest for defaults in payment of advance tax.

Tribunal's Findings:

Nature of Services Rendered by TEI:
The Tribunal examined the Memorandum of Understanding (MOU) between the assessee and TEI, which outlined that TEI's role was limited to introducing the prospective buyer and helping the assessee get the order. All technical discussions were to be held directly by the assessee with the buyer. The Tribunal noted that TEI's services were confined to procuring orders and did not involve managerial, technical, or consultancy services as defined under Explanation 2 to Section 9(1)(vii) of the Act.

Relevant Case Laws:
The Tribunal referred to several precedents, including the Delhi High Court's judgment in DIT (International Taxation) vs. Panalfa Autolektrik Ltd., which clarified that services for procuring export orders do not fall under managerial, technical, or consultancy services. Similarly, the Allahabad High Court in CIT vs. Model Exims held that agreements with non-resident commission agents for procuring orders do not involve rendering managerial or technical services, and thus, no tax withholding is required.

Permanent Establishment (PE) Consideration:
The Tribunal also observed that TEI did not have a Permanent Establishment (PE) in India. Therefore, the income received by TEI as commission from the assessee was not chargeable to tax in India, as it neither accrued nor was received in India. Consequently, the assessee was not required to deduct tax at source under Section 195.

Conclusion:
The Tribunal concluded that the payment made by the assessee to TEI was indeed a "commission payment" and not a "fee for technical services." It held that the AO and CIT(A) erred in making and enhancing the disallowance under Section 40(a)(i) of the Act. The Tribunal ordered the deletion of the entire disallowance of ?1,32,34,080 and allowed the assessee's appeal. Consequently, the Tribunal also found no basis for charging interest under Sections 234B and 234C.

Order Pronouncement:
The appeal filed by the assessee was allowed, and the order was pronounced in open court on August 24, 2020.