2015 (11) TMI 575 - AT - Income Tax

Disallowance of Commission Payment to Foreign Agents under IT Act 1961

The disallowance of commission payment to foreign agents under section 40(a)(i) of the Income-tax Act, 1961 was contested in this case. The Assessing ... Non deduction of tax at source u/s 195 - Disallowance of commission payment to foreign agents by applying the provisions of section 40(a)(i) - Held that:- section 195(1) envisages that tax is to be deducted at source on income which is chargeable under the provisions of the Income-tax Act. The hon'ble Supreme Court while interpreting the expression 'chargeable under the provisions of this Act' as employed under section 195(1) of the Act has held in the case of GE India Technology Centre P. Ltd. v. CIT [2010 (9) TMI 7 - SUPREME COURT OF INDIA] that the said expression would mean that the remittance has got to be of a trading receipt, the whole or part of which is liable to tax in India. However, if the payments made to non-residents are not chargeable to tax under the provisions of the Income-tax Act, then, the provisions of section 195 would not apply. The hon'ble Supreme Court further observed that if the scope of section 195 is enlarged to that extent, then, it would result in a situation where, even though, the income will have no territorial nexus with India or is not chargeable in India, the Government would nonetheless collect taxes. In the present case, on a perusal of the assessment order or the order of the learned Commissioner of Income-tax (Appeals), we do not find any conclusive finding given by the authorities concerned that the payments made to non-residents are chargeable to tax under the Income-tax Act. Applying the principles laid down by the hon'ble Supreme Court as aforesaid, it is to be held that the provisions of section 195 would not be applicable to payments made by assessee to non-resident agents. Thus the provisions of section 195 would not be applicable to the commission payments made by the assessee to non-resident Indians, as such income is not chargeable to tax under the provisions of the Act. Consequently, disallowance made under section 40(a)(i) would also not survive. - Decided in favour of assessee. Issues:Disallowance of commission payment to foreign agents under section 40(a)(i) of the Income-tax Act, 1961.Analysis:1. The primary issue in this case pertains to the disallowance of commission payment of &8377; 78,46,489 to foreign agents by invoking the provisions of section 40(a)(i) of the Income-tax Act, 1961. The Assessing Officer observed that the assessee failed to deduct tax at source on these payments as required under section 195 of the Act. The assessee argued that the commission agents were non-residents operating outside India, and the services were provided overseas, hence no tax deduction was necessary. However, the Assessing Officer disagreed, relying on the Authority for Advance Rulings' decisions, which interpreted that income accrues in India when the right to receive it arises. Consequently, the commission payment was disallowed under section 40(a)(i).2. The learned Commissioner of Income-tax (Appeals) upheld the disallowance, emphasizing that the assessee did not provide sufficient evidence to prove that section 195 was inapplicable. The Commissioner referred to the AAR decisions and supported the Assessing Officer's stance.3. The appellant contended that the disallowance was unjustified as the non-resident agents had no business presence in India, and the payments were for services rendered outside India. The appellant argued that the AAR decisions were not legally sound and cited various judicial precedents, including the Supreme Court's ruling in GE India Technology Centre P. Ltd. v. CIT [2010] 327 ITR 456 (SC) to support their claim.4. The ITAT analyzed the case, noting that the Assessing Officer did not dispute that the commission payments were for services provided outside India by non-resident agents without any business establishment in India. The ITAT highlighted that section 195 requires tax deduction only on income chargeable under the Act, as per the Supreme Court's interpretation. Since there was no evidence that the payments were taxable in India, the ITAT ruled in favor of the appellant, citing precedents like CIT v. Model Exims [2013] 358 ITR 72 (All) and CIT v. Faizan Shoes P. Ltd. [2014] 367 ITR 155 (Mad).5. Ultimately, the ITAT overturned the disallowance, following the precedent set in Aurobindo Pharma Ltd. case, where it was established that commission payments to non-residents for services provided abroad were not subject to TDS under section 195. Therefore, the addition of &8377; 78,46,489 was deleted, and the appeal of the assessee was allowed.