2014 (5) TMI 1128 - AT - Income Tax

Foreign agency commission payments to non-resident agents for services outside India not subject to tax deduction.

The Appellate Tribunal upheld the decision of the Commissioner of Income Tax (Appeals) regarding the non-deduction of tax at source on foreign agency ... TDS u/s 195 - payments of commission made by the assessee to the nonresident agents - non deduction of tds - Held that:- In the present case, the disputed agents were nonresidents. Those non-resident agents are carrying on the business wholly outside India. The assessee had paid commission to those non-resident agents for services rendered by them wholly outside India. It also has to be seen that the nonresident agents did not have any permanent establishment (PE) in India. The commissions were remitted by the assessee directly to the non-residents outside India. In the facts of the case as stated above, we find that the Commissioner of Income Tax (Appeals) is justified in holding that the payments of commission made by the assessee to the nonresident agents were not chargeable to tax in India in the hands of those non-resident agents. When no income is generated to the non-residents within India, those non-resident agents are not liable for any levy of income tax on account of the commissions they earned out of the services rendered outside India for the assessee. TDS arises only where there is a corresponding tax liability in the hands of the payee.- Decided against revenue Issues:- Interpretation of Section 40(a)(i) regarding foreign agency commission payments and tax deduction at source.Analysis:The appeal pertains to the assessment year 2010-11 and challenges the order of the Commissioner of Income Tax (Appeals) at Chennai, specifically focusing on the addition made under Section 40(a)(i) for non-deduction of tax at source concerning foreign agency commission payments amounting to `1,07,31,928/-. The primary contention raised by the Revenue is that the Commissioner erred in deleting this addition.Upon reviewing the case, it is observed that the assessee had deducted taxes at source on commissions paid to local agents as required by law. However, when it came to non-resident agents who did not have any income arising in India due to services provided outside the country, the assessee did not deduct any tax. These non-resident agents operated their business entirely outside India, did not have a permanent establishment in India, and received their commissions directly outside the country.In light of the facts presented, it was determined that the payments made to non-resident agents were not subject to tax in India, as these agents did not generate any income within the country. Consequently, since there was no tax liability on the commissions earned by non-resident agents for services conducted outside India, there was no requirement for tax deduction at source. The principle that Tax Deducted at Source (TDS) is only applicable when there is a corresponding tax liability for the payee was highlighted in this context.Ultimately, the Appellate Tribunal agreed with the decision of the Commissioner of Income Tax (Appeals) and dismissed the Revenue's appeal. The judgment was pronounced on May 8, 2014, in Chennai, confirming that the appeal filed by the Revenue was rejected.