2011 (4) TMI 1212 - AT - Income Tax

Tribunal upholds decision on non-resident payments

The Tribunal upheld the Commissioner of Income-tax (Appeals)'s decision to delete the disallowance of Rs. 6,04,58,699 under Section 40(a)(ia). It ... Disallowance u/s 040(a)(ia) - sales commission to non-resident - chargeable to tax or not - The assessee, a public limited company, is engaged in the business of manufacturing of insulators and bushings. The AO noticed that the assessee has made commission payments to the foreign companies. According to the AO, the assessee was liable to deduct the tax at source on payments made to non-resident in view of Circular No. 7 dated October 22, 2009. Since the assessee has not deducted the tax at source, therefore, the commission payable to these companies have not rendered any services to the assessee. No separate addition was made because the entire commission was disallowed under section 040(a)(ia). The Revenue has filed an appeal against the order of the learned CIT (A)-II. HELD THAT:- In the instant case, the sales commission is business profit of the non-resident. In the absence of a permanent establishment, such sales commission was not chargeable and therefore, there was no need for deducting the tax at source. Similarly, the payments in respect of subscription and advertisement cannot be considered to be covered under fees for technical services and therefore, no TDS was required to be deducted. The learned CIT(A) held that the insulator testing is covered under the technical services and the assessee is not in appeal before us. Similarly, the learned CIT (A) has also held that tax was required to be deducted in respect of remittances for technical services on which tax has not been deducted, is to be covered for non-deduction of tax at source. The assessee is not in appeal before us. we hold that the learned CIT (A) was justified in holding that no TDS was to be deducted in respect of remittances related to sales commission. In the result, all the appeals of the Revenue are dismissed. Issues Involved:1. Disallowance under Section 40(a)(ia) of the Income-tax Act for non-deduction of TDS on commission payments to foreign companies.2. Applicability of CBDT Circulars and their retrospective effect.3. Taxability of payments made to non-residents under Section 9(1)(i) and 9(1)(vii) of the Income-tax Act.4. Interpretation of 'fees for technical services' under Section 9(1)(vii) and Double Taxation Avoidance Agreements (DTAAs).5. Bona fide belief and its impact on TDS obligations.Detailed Analysis:1. Disallowance under Section 40(a)(ia) of the Income-tax Act:The primary issue was whether the assessee was liable to deduct TDS on commission payments to foreign companies. The Assessing Officer disallowed Rs. 6,04,58,699 under Section 40(a)(ia) for non-deduction of TDS. The assessee argued that the payments were made under the guidance of CBDT Circular No. 786, dated February 7, 2000, which was applicable at the time of payment and stated that no TDS was required for payments to non-resident agents operating outside India. The Commissioner of Income-tax (Appeals) upheld the assessee's view, noting that Circular No. 7 of October 22, 2009, which withdrew the earlier circular, was not retrospective.2. Applicability of CBDT Circulars and their Retrospective Effect:The Commissioner of Income-tax (Appeals) emphasized that beneficial circulars should be applied retrospectively, while oppressive circulars should be applied prospectively, citing Supreme Court judgments. The Tribunal concurred, stating that Circular No. 7 of 2009 could not be applied retrospectively to disallow payments made before its issuance. The Tribunal referenced the Supreme Court's decision in GE India Technology Centre P. Ltd. v. CIT, which clarified that if the amount paid to a non-resident is not chargeable to tax in India, no TDS is required.3. Taxability of Payments Made to Non-residents under Section 9(1)(i) and 9(1)(vii):The Tribunal analyzed Section 9 of the Income-tax Act, which deals with income deemed to accrue or arise in India. The Tribunal noted that the non-residents provided services outside India, and their income was business profit, not taxable in India due to the absence of a permanent establishment. The Tribunal also referenced DTAAs with the UK and UAE, which confirmed that business profits are taxable only if the non-resident has a permanent establishment in India.4. Interpretation of 'Fees for Technical Services' under Section 9(1)(vii) and DTAAs:The Tribunal examined the definition of 'fees for technical services' under Section 9(1)(vii) and various DTAAs. It concluded that the services provided by the non-residents were not managerial, technical, or consultancy services as defined. The Tribunal referred to decisions by the Authority for Advance Rulings and various High Courts, which supported the view that sales commission paid to non-residents for services rendered outside India is not taxable in India.5. Bona Fide Belief and its Impact on TDS Obligations:The Tribunal considered the assessee's bona fide belief in not deducting TDS based on the prevailing circulars. It referenced the Special Bench decision in ITO v. Prasad Production Ltd., which held that if the payer believes no part of the payment is chargeable to tax, they are not obligated to deduct TDS. The Tribunal agreed with the Commissioner of Income-tax (Appeals) that the assessee acted on a bona fide belief and was justified in not deducting TDS.Conclusion:The Tribunal upheld the Commissioner of Income-tax (Appeals)'s decision to delete the disallowance of Rs. 6,04,58,699 under Section 40(a)(ia). It confirmed that Circular No. 7 of 2009 could not be applied retrospectively and that the payments made to non-residents were not taxable in India. The Tribunal dismissed the Revenue's appeals, affirming that no TDS was required on the sales commission and other related payments made to non-residents for services rendered outside India.