Foreign agency commission paid abroad not chargeable to tax in India, so no TDS obligation and no disallowance

Foreign agency commission paid to a non-resident for services wholly rendered outside India was held not to be income deemed to accrue or arise in India and therefore not chargeable to tax in India. As no tax was deductible at source on a sum not so chargeable, section 195 did not apply. Since deduction under section 40(a)(i) depends on tax being deductible, disallowance could not be made. The CBDT circulars on foreign agents and export commission supported this position, and Transmission Corporation was distinguished because it concerned sums that were at least partly chargeable to tax.

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Issues: Whether foreign agency commission paid to a non-resident for services rendered outside India was chargeable to tax in India so as to attract deduction of tax at source under section 195 of the Income-tax Act, 1961 and disallowance under section 40(a)(i) of the Income-tax Act, 1961.

Analysis: The non-resident agent was found to have operated outside India and the services consisted of procuring orders, pursuing payments and resolving quality and supply issues abroad. On these facts, the commission was not income deemed to accrue or arise in India and was not a sum chargeable under the Income-tax Act, 1961. The CBDT circulars dealing with foreign agents of Indian exporters and export commission were applicable, and no tax was deductible under section 195 where the payment itself was not chargeable to tax in India. The disallowance mechanism under section 40(a)(i) could operate only where tax was deductible at source. The decision in Transmission Corporation was distinguished as it dealt with sums that were at least partly chargeable to tax.

Conclusion: The foreign agency commission was not chargeable to tax in India and no obligation to deduct tax at source arose; consequently, section 40(a)(i) could not be invoked against the assessee.

Final Conclusion: The disallowance was deleted and the Revenue's appeal failed.

Ratio Decidendi: Where commission is paid to a non-resident for services wholly rendered outside India and the sum is not chargeable to tax in India, section 195 does not require deduction of tax at source and section 40(a)(i) cannot be applied for disallowance.

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