2011 (2) TMI 105 - AT - Income Tax

Non-resident entity not liable for tax on services outside India. Disallowance under Sec 40(a)(i) deleted.

The tribunal held that the commission paid to a non-resident entity for services rendered outside India was not chargeable to tax in India as there was no ... Commission income - Disallowance u/s 40(a)(i) - Deemed income u/s 9 - TDs u/s 195 - since the assessee was not in a position to interact and set up a sales and marketing support management operations in the clients’ locations, ETUK was to invest and operate the sales and marketing operations from UK. Thus, ETUK rendered services to the assessee company outside India. - Held that: no business connection exists, much less is established. The operations carried out by ETUK were not carried out in India. ETUK does not have any permanent establishment in India. ETUK was acting as the assessee’s marketing agent and was providing marketing and sales support to all purchases executed by the assessee company for its overseas clients. - It was for the rendering of this service that the commission was paid by the assessee to ETUK. The payment was remitted outside India. - the provisions of section 9(1)(i) of the Act are not fulfilled and there is no deemed accrual of income in India. So, there is no income which could be said to be includible in the total income of ETUK, u/s 5(1) of the Act and, therefore, there is no case for charging income tax in respect of the commission payment made by the assessee to ETUK, under section 4(1) of the Act.Sec. 195 - TDS on any Sum - held that: If the contention of the Department that the moment there is remittance the obligation to deduct TAS arises is to be accepted then we are obliterating the words “chargeable under the provisions of the Act” in section 195(1). The said expression in section 195(1) shows that the remittance has got to be of a trading receipt, the whole or part of which is liable to tax in India. The payer is bound to deduct TAS only if the tax is assessable in India. If tax is not so assessable, there is no question of TAS being deducted. (See: Vijay Ship Breaking Corporation and Others v. CIT, (2008 -TMI - 31137 - SUPREME COURT )).Commission - In “CIT v. Toshoku Limited”(1980 -TMI - 5841 - SUPREME Court)it was observed that the expression “business connection” pre-supposes that the business is carried on in India by the non-resident. The commission amounts earned by the non-resident for the services rendered outside India were held incapable of being deemed to be income accrued or arisen in India. In the present case also, the commission amount has been earned by ETUK, undisputedly, for the services rendered in the UK and not in India. Issues Involved:1. Disallowance under Section 40(a)(i) of the Income Tax Act.2. Applicability of TDS on commission paid to a non-resident entity.3. Interpretation of 'business connection' under Section 9(1)(i) of the Income Tax Act.4. Relevance of CBDT Circulars in determining tax liability.5. Applicability of Supreme Court judgments in similar contexts.Detailed Analysis:1. Disallowance under Section 40(a)(i) of the Income Tax Act:The primary issue is whether the CIT(A) correctly deleted the disallowance of Rs. 33,36,068/- made by the AO under Section 40(a)(i) of the Income Tax Act. The AO disallowed the deduction on the grounds that the commission paid to M/s. EON Technologies, U.K. (ETUK) was not subjected to TDS, which he believed was required.2. Applicability of TDS on commission paid to a non-resident entity:The AO argued that the commission payment to ETUK should have been subjected to TDS as it was deemed to accrue or arise in India due to the business connection between the assessee and ETUK. The assessee contended that ETUK rendered services outside India, and hence, the commission was not chargeable to tax in India, making TDS inapplicable.3. Interpretation of 'business connection' under Section 9(1)(i) of the Income Tax Act:The AO held that ETUK had a business connection in India, which made the income liable to tax in India. However, the CIT(A) and the appellate tribunal found that no such business connection existed, as ETUK rendered services outside India. Therefore, the income did not accrue or arise in India, and the provisions of Section 9(1)(i) were not applicable.4. Relevance of CBDT Circulars in determining tax liability:The CIT(A) relied on CBDT Circular No. 786 dated 7.2.2000 and Circular No. 23 dated 23.7.1969, which state that commission paid to non-residents for services rendered outside India is not chargeable to tax in India. These circulars are binding on the Department, and the tribunal upheld their applicability in this case.5. Applicability of Supreme Court judgments in similar contexts:The Department cited the Supreme Court judgment in 'Transmission Corporation of Andhra Pradesh Ltd. v. CIT' to argue that TDS was required. However, the tribunal found that this case was not overruled by 'GE India Technology Centre (P) Ltd. v. CIT,' which clarified that TDS is not required if the sum is not chargeable to tax under the Income Tax Act. The tribunal emphasized that the chargeability of the sum under Section 4 of the Act is a prerequisite for TDS under Section 195.Conclusion:The tribunal concluded that since ETUK rendered services outside India, there was no business connection in India, and the commission paid was not chargeable to tax in India. Consequently, TDS was not required, and the disallowance under Section 40(a)(i) was correctly deleted by the CIT(A). The appeal filed by the Department was dismissed.