2015 (11) TMI 1205 - AT - Income Tax

Tribunal decision on excessive remuneration & foreign agent commissions under Income Tax Act

The Tribunal partly allowed the Revenue's appeal, reversing the CIT(A)'s decision on excessive remuneration under section 40A(2)(b) of the Income Tax Act, ... Addition under section 40A(2)(b) - CIT(A) deleted addition - Held that:- The assessee has failed to substantiate the work performed by Mr. Preetpal Singh. The ld. AR also could not controvert the argument of the ld. SR DR that the salary paid by the assessee company to Mr. Preetpal Singh for the post of Vice President Marketing was much higher than the salary paid by the sister concern of the assessee to him for the role of Director of that company. Thus, we find that payment of remuneration to Mr. Preetpal Singh was excessive having regard to the fair market value of services rendered by him. We also agree with the contention of the ld. Sr DR that the assessee failed to explain and substantiate the needs of the business of the assessee for hiring services of Mr. Peetpal Singh and the benefit accrued to the business of the assessee by inducting Mr. Peetpal Singh. The offer price in letter of ‘Swastik Outsourcing’, submitted by the assessee before the learned Commissioner of Income-tax is only an imaginary figure which never materialized. In our view, the assessee has failed in all tests laid down in decision of Spark Hotels (P) Ltd (2012 (6) TMI 689 - ITAT DELHI ) with regard to remuneration paid to Mr. Preetpal Singh. In view of the facts and circumstances of the case and we are of the opinion that allowance of salary/ remuneration to Mr. Preetpal Singh restricted by the Assessing officer to 50% of the amount paid is justified and therefore, the order that of passed by the learned Commissioner of Income-tax (Appeals) on this issue is reversed. Accordingly, the first ground of the Revenue is allowed. Addition under section 40(a)(ia) - commission paid of foreign agents - absence of deduction of tax at source - Held that:- AR has successfully demonstrated that the selling agents were located outside India and service of procuring orders and following payment from buyers etc was performed by them outside India. Once it is established that services are performed outside India, the provision of section 9 are not applicable in the case of foreign residents. The learned Commissioner of Income-tax (Appeals) has discussed the applicability of the circular of the CBDT and we are in agreement with the conclusion of the learned Commissioner of Income-tax (Appeals) on this issue as the assessee was not required to deduct tax at source on the payment made to foreign selling agents - Decided against revenue Issues Involved:1. Deletion of addition made under section 40A(2)(b) of the Income Tax Act, 1961.2. Deletion of addition made under section 40(a)(ia) on account of commission paid to foreign agents.Issue-wise Detailed Analysis:1. Deletion of addition made under section 40A(2)(b) of the Income Tax Act, 1961:The Revenue challenged the deletion of an addition of Rs. 24,00,000/- made by the Assessing Officer (AO) under section 40A(2)(b) of the Income Tax Act, 1961. The AO observed that Mr. Preetpal Singh, a specified person under this section, was paid Rs. 48 lakhs without any formal appointment letter or contract, and there was no significant improvement in the company's financial position after his joining. Consequently, the AO disallowed 50% of the remuneration as excessive and unreasonable.The assessee argued before the Commissioner of Income-tax (Appeals) [CIT(A)] that the AO had arbitrarily applied section 40A(2)(b) without determining the fair market salary for a similar position. The CIT(A) considered the educational qualifications and experience of Mr. Preetpal Singh and various case laws, ultimately deciding in favor of the assessee.The Tribunal examined the qualifications and experience of Mr. Preetpal Singh, noting that he did not possess special qualifications or relevant experience in software, which were claimed as part of his responsibilities. The Tribunal found the remuneration excessive compared to the fair market value of services rendered and the salary paid by a sister concern for a similar role. The Tribunal held that the assessee failed to justify the business need and benefits derived from Mr. Preetpal Singh's services. Consequently, the Tribunal reversed the CIT(A)'s order and upheld the AO's decision to disallow 50% of the remuneration. Thus, the first ground of the Revenue was allowed.2. Deletion of addition made under section 40(a)(ia) on account of commission paid to foreign agents:The Revenue also contested the deletion of an addition of Rs. 15,00,149/- made by the AO under section 40(a)(ia) for commission paid to foreign selling agents without tax deduction at source. The AO considered the services rendered by non-resident agents as 'Fee for Technical Services' (FTS) and applied section 195 for tax deduction.The assessee contended that section 9 of the Act was not applicable, as the commission paid did not fall under FTS, and the services were performed outside India. The CIT(A) agreed, stating that the non-residents did not conduct business operations in India, and the relevant CBDT Circular No.7 of 2009 was not applicable for the assessment year 2009-10.The Tribunal reviewed the agreements with foreign selling agents and confirmed that the services were performed outside India, thus section 9 was not applicable. The Tribunal upheld the CIT(A)'s decision, agreeing that no tax deduction at source was required for the payments made to foreign agents. Therefore, the second ground of the Revenue was dismissed.Conclusion:The appeal of the Revenue was partly allowed, with the Tribunal reversing the CIT(A)'s decision on the remuneration issue but upholding the CIT(A)'s decision on the commission paid to foreign agents. The order was pronounced in the Court on 14/10/2015.