2014 (10) TMI 748 - HC - Income Tax

ITAT Upholds Non-Resident Commission Payments Exemption

Commissioner of Income Tax Versus M/s. Modern Insulators Ltd.

The Income Tax Appellate Tribunal (ITAT) upheld the Commissioner of Income Tax (Appeals) (CIT(A)) decision to delete the disallowance of commission ... Payment of commission to non-resident agents – Liability to deduct TDS – Question of law not challenged before Tribunal - Held that:- The question of deduction of tax at source under Section 195 would arise only if the payment of commission to a non-resident is chargeable to tax in India the fact that the payment was remitted directly abroad and it cannot be held to have been received on or on behalf of the agent in India - The circular No.7 dt. 22/10/2009 cannot be considered retrospectively to make it applicable for payments made before that date – The Tribunal had rightly held that the non-residents/ foreign agents have provided services for earning commission and the services have been rendered outside India, the Commission so earned by non-resident is a business profit – the question framed was not challenged before the Tribunal, then on what basis substantial question of law can be said to be raised - This shows the lackadaisical approach of the revenue officers - the question does not arise out of the order of Tribunal. It is a finding of fact arrived at by the CIT(A) after elaborate discussion that rate of commission was same for all the foreign agents and when AO has been satisfied about other payments nothing was brought on record by the AO to justify about disallowance of commission payment to these two foreign agents, merely because amount is more, that by itself does not justify disallowance and AO has to bring on record something more to disallow any payment, there is also a finding of fact appreciated by the CIT(A) that the assessee had to establish in foreign markets which are highly competitive, therefore services of these foreign agents/companies was taken by the assessee – thus, no substantial question of law arises for consideration – Decided against revenue. Issues:1. Disallowance of commission payments to non-resident agents under Section 40(a)(ia) of the IT Act.2. Business expediency of the commission payments.3. Applicability of Circular No.786 dated 07/02/2000 and Circular No.7 dated 22/10/2009.Analysis:Issue 1: Disallowance of commission payments to non-resident agents under Section 40(a)(ia) of the IT Act:The dispute revolved around the disallowance of commission payments made by the respondent-company to non-resident agents due to failure in deducting tax at source under Section 195 of the IT Act. The Assessing Officer (AO) disallowed the entire amount under Section 40(a)(ia) as tax was not deducted at source. However, the Commissioner of Income Tax (Appeals) (CIT(A)) deleted the disallowance, citing business expediency and Circular No.786 dated 07/02/2000, which stated that no tax deduction was required for payments to non-residents for services rendered outside India. The Income Tax Appellate Tribunal (ITAT) upheld the CIT(A)'s decision, emphasizing that Circular No.7 dated 22/10/2009 could not be applied retrospectively, and the commission payments were not chargeable to tax in India.Issue 2: Business expediency of the commission payments:The CIT(A) found that the respondent had justified the commission payments to non-resident agents based on business expediency, and the ITAT concurred with this finding. The revenue argued against the business expediency, questioning the substantial payments made without proper justification. However, the ITAT held that the revenue did not challenge this aspect before them, and the lack of evidence presented by the AO to disallow the payments indicated no substantial grounds for interference.Issue 3: Applicability of Circular No.786 dated 07/02/2000 and Circular No.7 dated 22/10/2009:The circulars played a crucial role in determining the tax liability on commission payments to non-resident agents. The courts emphasized that Circular No.786 clarified the non-taxability of payments to non-residents for services rendered outside India, and Circular No.7 could not be applied retrospectively. The ITAT highlighted the provisions of Double Taxation Avoidance Agreements (DTAA) between India and other countries, stating that the commission payments were not taxable in India as the foreign agents did not have a permanent establishment in India.In conclusion, the appeal was dismissed as the courts found no merit in the revenue's arguments, emphasizing the lack of substantial grounds to challenge the business expediency of commission payments and the applicability of the relevant circulars in the case.