2014 (11) TMI 275 - AT - Income Tax

Foreign Commission Payment Deemed Non-Taxable; Disallowance under Section 40(a)(ia) Unnecessary

The Deputy Commissioner of Income-tax Versus M/s. Transformers & Electricals Kerala Ltd.

The Tribunal upheld the CIT(A)'s decision, ruling that the commission paid to foreign agents was not taxable in India as the services were rendered ... Allowbility of the claim u/s. 40(a)(ia) r.w.s. 9(1) - Payment of sales commission made to the selling agents without deduction of TDS – Held that:- The disallowance shall be made in case of any payment made which is chargeable under this Act and is payable outside India or in India to a non resident not being a company or to a foreign company on which tax is deductible at source - the agreement entered into by the assessee with foreign agents revealed that they have been appointed to act as Commission agents outside India in their respective countries -there is nothing on record to suggest that the income is chargeable to tax in India or the payment has been received by the non resident agents in India or by any other person on their behalf - the non-resident agents did not carry out any business operations in India and has acted as selling agents of the assessee outside India - the commission earned by them for services rendered by them outside India cannot be considered as income chargeable to tax in India. The AO has failed to bring any material on record on the basis of which it could be concluded that commission paid to foreign agents is chargeable to tax in India - Unless the income is chargeable to tax in India, then tax is not required to be deducted u/s 195(1) - no definite conclusion can be made that the commission paid to foreign agents is chargeable to tax in India - the foreign concern, namely M/s. Al Hassan Electricals Company, Oman was acting as the selling agent for the assessee and for that the assessee had outside India and no services rendered by it within the taxable territory, the amount payable as commission was not liable to tax and as the income is arising or accruing to a foreign concern in India, therefore, no disallowance u/s. 40(a)(ia) of the Act on the ground that the tax is not deducted at source u/s. 195 of the Act or remittances made to a foreign concern – Decided against revenue. Issues:1. Allowability of claim of the assessee u/s. 40(a)(ia) r.w.s. 9(1) of the I.T. Act towards payment of sales commission made to selling agents without deduction of TDS.Analysis:The appeal was filed against the order passed by the Ld. CIT(A)-II, Kochi for the assessment year 2006-07. The Assessing officer disallowed the claim u/s. 40(a)(ia) due to non-deduction of TDS on payments made to a company in Oman. The Assessing officer held that the company in Oman was a dependent agent of the assessee, providing various services falling within the ambit of the explanation to section 9, hence TDS should have been deducted. The CIT(A) disagreed, stating that since the company was located in Oman and had no permanent establishment in India, the income did not accrue in India, thus disallowance was incorrect.The Revenue argued that even though the services were rendered abroad, the income was deemed to accrue in India due to the agent's business connection or source of income in India. They relied on legal precedents to support their position. On the other hand, the assessee contended that the income accrued outside India, and as per the agreement, the services were rendered abroad, so no income arose under the Act. They emphasized that TDS deduction is only required when the income is chargeable to tax under the Act.The Tribunal analyzed the provisions of the Act, emphasizing that the disallowance should only occur if the payment is chargeable under the Act and the income is deemed to accrue in India. It was noted that there was no evidence to suggest that the non-resident agents had any business connection or permanent establishment in India. Therefore, the commission earned outside India by the agents was not taxable in India. The Tribunal concluded that without proof that the commission was chargeable to tax in India, no TDS deduction was required.In the absence of concrete evidence that the commission paid to foreign agents was taxable in India, the Tribunal dismissed the appeal filed by the Revenue. The decision was based on the understanding that the income accrued to the foreign concern outside India, and as no services were rendered within the taxable territory, the commission payment was not liable to tax in India. Consequently, the disallowance under section 40(a)(ia) for non-deduction of TDS was deemed unnecessary.In conclusion, the Tribunal upheld the CIT(A)'s decision, emphasizing that without clear evidence of taxability in India, no TDS deduction was warranted, leading to the dismissal of the Revenue's appeal.