Commission paid to non-resident not taxable in India; TDS under s.195 not mandatory on gross payment; s.40(a)(ia) disallowance refused

HC held for the respondent assessee, rejecting Revenue's claim that commission income paid to a non-resident accrued or was deemed to accrue in India and therefore required TDS and disallowance under s.40(a)(ia). The court affirmed that s.195 requires withholding only where the payment is chargeable to tax in India; if the sum is not chargeable in entirety, TDS is not mandatory on the gross payment. The HC upheld the findings of the lower authorities and decided against disallowance of the expenditure.

---

---

Issues Involved:
1. Whether the Income Tax Appellate Tribunal (ITAT) erred in upholding the order of the Commissioner of Income Tax (Appeals) [CIT(A)] deleting the addition made by the Assessing Officer (AO) under Section 40(a)(i) of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Nature of Commission Paid:
The respondent, a private limited company, paid a commission of Rs. 33,36,068/- to its parent company in the UK for procuring export contracts. The nature, quantum, and entitlement of the commission were undisputed.

2. Revenue's Contention:
The Revenue argued that the commission income earned by the UK company accrued or was deemed to accrue in India, making the respondent liable to deduct tax at source. Failure to do so should lead to disallowance under Section 40(a)(i) of the Act.

3. Assessing Officer's Reasoning:
The AO's reasoning was deemed confusing and unclear. The AO held that the right to receive income by the UK company had its origin in India, and thus, the commission income was taxable in India. The AO also mentioned the business connection between the respondent and the UK company but did not elaborate on this aspect.

4. Concept of Deemed Accrual:
The court clarified that the concept of deemed accrual of income is distinct from income actually accruing, arising, or being received in India. Section 5(2) of the Act was discussed, which includes income received or deemed to be received in India or accruing or deemed to accrue in India.

5. Section 9 of the Act:
Section 9 postulates when income is deemed to arise in India. The AO did not specify any provision of Section 9 but seemed to invoke Section 9(1)(i), which deals with income accruing through business connections in India. The AO failed to examine whether the commission income arose directly or indirectly from any business connection in India.

6. Circulars by CBDT:
The CIT(A) relied on two CBDT circulars, Circular No. 23 dated 23rd July 1969 and Circular No. 786 dated 7th February 2000. Both circulars clarified that commission paid to foreign agents operating outside India is not taxable in India, and no tax is deductible under Section 195 from such payments.

7. Supreme Court Decisions:
The court referred to the Supreme Court's decision in C.I.T. vs. Toshoku Limited, which held that commission earned by non-residents for services rendered outside India cannot be deemed to have accrued or arisen in India. The court also cited the Supreme Court's interpretation of "business connection" in various cases, emphasizing that it requires a real and intimate connection contributing to the income earned.

8. Section 195 of the Act:
The scope of Section 195 was discussed, with reference to the Supreme Court's decision in GE India Technology Centre (P) Ltd. vs. CIT. It was held that TDS provisions apply only to sums chargeable to tax under the Act. If the payment is not chargeable to tax, TDS is not required.

9. Conclusion:
The court concluded that the CIT(A) and ITAT correctly applied the law and found no error in their findings. The appeal was dismissed, and no costs were awarded.

Summary:
The court upheld the ITAT's decision, agreeing that the commission paid to the UK company did not accrue or arise in India and was not subject to TDS under Section 195. The AO's reasoning was found to be unclear and unsupported by factual examination. The court relied on CBDT circulars and Supreme Court decisions to conclude that the commission income was not taxable in India, leading to the dismissal of the Revenue's appeal.

---