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TMI Blog2021 (2) TMI 726X X X X Extracts X X X X X X X X Extracts X X X X ..... ia and in absence of any income chargeable to tax, there was no liability to deduct tax at source u/s 195(1) and the provisions of section 40(a)(i) therefore cannot be invoked in the instant case. Further, out of total commission payment of ₹ 99,84,436, an amount of ₹ 1,55,867/- has been paid to a resident entity on which TDS has already been done which is again out of the ambit of provisions of section 40(a)(i) of the Act. In light of above discussions and considering the entirety of facts and circumstances of the case, the disallowance made by the Assessing officer by invoking provisions of section 40(a)(i) is hereby directed to be deleted. Appeals filed by the assessee are allowed. - ITA Nos. 198/JP/2019 ITA Nos. 199/JP/2019 - - - Dated:- 15-2-2021 - SHRI SANDEEP GOSAIN, JM And SHRI VIKRAM SINGH YADAV, AM Assessee by : Shri Madhukar Garg (CA) Revenue by : Smt. Runi Pal (JCIT) ORDER PER : VIKRAM SINGH YADAV , A. M. These are two appeals filed by the assessee against the orders of ld. CIT(A), Ajmer dated 10.12.2018 14.12.2018 for AY 2014-15 2015-16 respectively. Since the common issues are involved, both these appeals were heard together ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AR submitted that the appellant company is a public limited company deriving income from polyester viscose, blended woolen yarn etc. and the company was declared a sick company by the Board of Financial Reconstruction on 21.5.2005. The Assessing Officer while completing the assessment has mentioned that the company had paid commission of ₹ 99,84,435/- to foreign agents as sales commission during the year and no tax was deducted at source as per the provisions of section 195. The assessee in response to the show cause notice has filed a detailed reply which has been reproduced by the Assessing Officer from pages 3-7 of the order. However, the Assessing Officer had not accepted the contention of the assessee that no tax was required to be deducted at source and relying on Explanation 2 to Section 195(1) introduced by the Finance Act, 2012 with retrospective effect from 1.4.1962 held that the payment of commission by the assessee is nothing but a fee which has been paid by the resident assessee to non-resident for technical services rendered by him holding that the commission was fee for technical services and the assessee was required to deduct tax at source on the said paymen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d CIT(Appeals) as well as the Assessing Officer has failed to appreciate the provisions of section 195 of the IT Act. From the provisions of section 195(1), it is clear that any person responsible for paying to a non-resident any interest or any other sum chargeable to tax under the provisions of the Act, shall, at the time of credit of such income to the account of the payee, deduct income tax thereon at the rates in force. Thus, it is quite clear that tax is required to be deducted at source from the element of income embedded in the total payment being made by the person responsible in respect thereof, to the non-resident entity. If the amount paid by the assessee is not chargeable to tax in India in respect of the payee, no tax is required to be deducted at source. Reliance in this regard is placed on the decision of Hon ble Supreme Court in the case of GE(India) Technology Centre (P) Ltd. Vs. CIT reported in 327 ITR 456 wherein it has been held by the Hon ble Supreme Court that The most important expression in section 195(1) of the Income-tax Act, 1961, dealing with deduction of tax at source consists of the words chargeable under the provisions of the Act. A person paying ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facts and circumstances of each case taking into account nature of remittances, income component therein or any other fact relevant to determine such appropriate proportion. Thus, the CBDT has also mentioned that tax is only required to be deducted at source in respect of the amount of remittance which is in the nature of income. 10. Further attention is invited to Circular No.3/2015 dated 12.02.2015 in which the Board has clarified regarding disallowance to be made u/s 40(a)(i). It has clearly been mentioned in the Circular as follows:- As disallowance of amount under section 40(a)(i) of the Act in case of a deductor is interlinked with the sum chargeable under the Act as mentioned in section 195 of the Act for the purpose of tax deduction at source, the Central Board of Direct Taxes, in exercise of powers conferred under section 119 of the Act, hereby clarifies that for the purpose of making disallowance of other sum chargeable under section 40(a)(i) of the Act, the appropriate portion of the sum which is chargeable to tax under the Act shall form the basis of such disallowance and shall be the same as determined by the Assessing Officer having jurisdiction for the purp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee company are not having any permanent establishment in India. This matter has been considered by the ITAT, Jaipur Bench, Jaipur in the case of Satyam Polyplast vs. DCIT reported in 106 Taxmann.com 145(Jpr.Trib) wherein it was held as under:- The payment in question is commission and prima facie not royalty or fee for technical services (FTS). The Assessing Officer though observed that the payment in the nature of FTS, however, the Assessing Officer has not examined or not given the finding as to how the payment in question is FTS and what is the nature of service rendered by the non- resident. Even otherwise the issue of FTS has to be considered in light of definition provided in respect the DTAA. It is found that the Commissioner(Appeals) for the assessment year 2013-14 has clearly given a finding that the payment in question is not fee for technical services but it is a regular payment to the non-resident in the nature of ordinary course of business. Even otherwise the Commissioner(Appeals) has upheld the order of the Assessing Officer only on the ground that as per the Explanation II of section 195(1), the assessee was under obligation to deduct the tax at source for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n deducted at source in respect of the said payment and hence, the same cannot be considered for disallowance under the provisions of section 40(a)(i) of the Act. 14. In her submissions, the ld D/R submitted that the assessee company has paid commission of ₹ 99,84,435/- to foreign agents as sales commission during the year on which TDS was not done as per provisions of section 195 read with Explanation II to the said section wherein it is clarified that: the obligation to comply with sub section (I) and to make deduction there under applies and shall be deemed to have always applied and extends and shall be deemed to have always extended to all persons, resident or nonresident, whether or not the non-resident person has (i) a residence or place of business or business connection in India; or (ii) any other presence in any manner whatsoever in India'. 15. It was further submitted that section 9(1) (vii) would classify and cover all incomes as accruing and arising in India which partake the character of payment on account of Fee for technical services , which in turn, has been defined to include any payment for rendering of any managerial or consultancy service ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase of JLC Electromet P Ltd vs ACIT (supra) has dealt with an identical issue of disallowance of commission payment to non-residents u/s 40(a)(i) due to non-deduction of TDS and where (speaking through one of us), it was held as under: 23. We have heard the rival contentions and perused the material available on record. During the course of assessment proceedings, the Assessing Officer found that the assessee has made payment of selling commission, exhibition expenses and testing expenses to various non- resident entities, without deducting tax at source and a show cause was issued as to why this payment should not be disallowed u/s 40(a)(ia) in view of insertion of Explanation 2 to section 195 by the Finance Act, 2012 with retrospective effect from 01.04.1962. In response, the assessee submitted that it is not required to deduct any tax at source as per provisions of section 195(1) since these payments are not chargeable to tax in India as no income accrues or arises in India in respect of these transactions in the hands of the non-resident entities, the services have been rendered outside India by these non-resident entities and the payment have also been made outside of Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nection in India or any other presence in any manner whatsoever in India. 26. We therefore find that the explanation 2 to section 195 talks about the person who is making/crediting the payment rather than the person who is receiving the payment as the obligation to comply with sub- section (1) is on the person who has to deduct tax at source while making or crediting the payment to the account of the payee. The explanation provides that the obligation to deduct tax at source applies to all persons but it doesn t and cannot take away the fundamental requirement under law which is that the sum has to be chargeable under the provisions of the Act and therefore, only in a scenario, the sum is chargeable under the Act, the obligation is cast on all persons to deduct tax at source irrespective of the residential status or business connection or presence in India. We therefore find that reading of the said explanation by the lower authorities is not correct and only in a scenario, the payment is chargeable to tax, the tax is required to be deducted at source. The said position has also been clarified in the memorandum explaining the provisions of the Finance Bill, 2012 which reads as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or after deduction has not been paid on or before the due date specified in section 139(1) of the Act. We therefore find that both the provisions of section 195(1) as well as 40(a)(ia) of the Act talks about deduction of tax at source where the sum is chargeable under this Act. 29. The taxability of commission payment has recently been examined by the Co-ordinate Bench in case of Satyam Polyplast vs. DCIT, Jaipur (Supra) wherein it was held as under:- Once the payment in question is commission then the provisions of Section 40 (a)(i) of the Act are applicable only if such sum is chargeable to tax under this Act. As per provisions of Section 5(2) of the Act the total income of non-resident includes all income from whatsoever sources derived which is received or deemed to be received in India accrues or arises or is deemed to accrue or arise to him in India during such year. For ready reference we quote to Section 5(2) reproduced as under:- 5(2) Subject to 11 the provisions of this Act, the total income 12 of any previous year of a person who is a non-resident includes all income from whatever source derived which- (a) is received 14 or is deemed to be recei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in India. Similarly the exhibition expenses have been paid in respect of participation in various exhibitions held outside of India and even the testing charges have been paid for testing services outside of India. Therefore, these payments will not fall in the category of income which has accrued or arisen or deemed to accrued or arise in India. Further, payments have been made outside of India. Accordingly, we are of the considered view that there was no liability to deduct tax at source u/s 195(1) as these payments are not chargeable to tax and the provisions of section 40(a)(ia) cannot be invoked in the instant case. 17. In the present case, the facts are pari-materia where the commission has been paid to various non-resident entities in respect of sales affected by the assessee outside of India, the services have been rendered by these entities outside of India and the payments have been made outside of India. In light of these undisputed facts, the legal proposition laid down in the aforesaid decision equally applies in the instant case and commission paid to non-resident outside India for the services rendered outside India will not fall in the category of the income re ..... X X X X Extracts X X X X X X X X Extracts X X X X
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