No TDS on overseas commission; export commission allowed, 80HHC recomputation restricted to book profits under section 115JA

ITAT Hyderabad dismissed the Revenue's appeals and upheld CIT(A)'s order. It held that commission paid to non-resident overseas agents for services rendered outside India was not chargeable to tax in India under sections 4, 5 and 9, hence no obligation to deduct TDS under section 195 arose and disallowance under section 40a(ia) was unwarranted. Consequently, export commission payments were allowable as expenditure. On deduction under section 80HHC, the ITAT agreed that the AO was bound by the earlier remand and could recompute 80HHC only for determining book profits under section 115JA, following the Syncome Formulations Special Bench decision.

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Issues Involved
1. Disallowance of commission paid to non-resident agents under section 40a(i) of the Income Tax Act.
2. Computation of deduction under section 80HHC of the Income Tax Act when income is computed under section 115JA.

Issue-wise Detailed Analysis

Disallowance of Commission Paid to Non-Resident Agents under Section 40a(i)
The revenue challenged the deletion of disallowance made by the assessing officer under section 40a(i) for commission payments to non-resident agents. The assessing officer had disallowed Rs. 33,54,926/- on the grounds that no tax was deducted at source. The CIT (A) deleted this disallowance except for the payment made to M/s. San International, citing that the payments were made for services rendered outside India and remitted through banking channels as per RBI regulations. The CIT (A) relied on various judicial pronouncements and CBDT Circulars, which were binding on the revenue, to conclude that the payments did not attract TDS provisions.

The Tribunal upheld the CIT (A)'s decision, emphasizing that the payments to non-resident agents did not accrue or arise in India and were not liable to tax in India under section 195. The Tribunal referred to the Supreme Court's decision in CIT vs. Toshoku Limited and other judicial precedents to support this view. It was noted that the withdrawal of earlier CBDT Circulars did not impact the applicability of section 195, as the income was not taxable in India. Consequently, the disallowance under section 40a(i) was not justified.

Computation of Deduction under Section 80HHC
The revenue also contested the CIT (A)'s direction to restrict the computation of deduction under section 80HHC only for the purpose of working out the book profit under section 115JA, as per the Tribunal's earlier order. The assessing officer had recomputed the deduction under section 80HHC under the normal provisions, which was beyond the Tribunal's remand order.

The Tribunal clarified that its earlier order directed the computation of deduction under section 80HHC based on the adjusted book profit under section 115JA, following the Special Bench decision in DCIT vs. Syncome Formulations (I) Ltd. The CIT (A) was correct in restricting the computation to this context, and any adjustment under normal provisions was not warranted. The Tribunal upheld the CIT (A)'s direction, rejecting the revenue's appeal on this ground.

Conclusion
The Tribunal dismissed all the appeals filed by the revenue, affirming the CIT (A)'s decisions on both issues. The disallowance of commission payments to non-resident agents under section 40a(i) was not justified, and the computation of deduction under section 80HHC was to be restricted to the context of section 115JA as per the Tribunal's earlier directive. The order was pronounced on 25-03-2011.

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