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The solitary issue arising for consideration in the present appeal relates to the deletion of disallowance made u/s. 40(a)(i) of the Income Tax Act, 1961 by the Assessing Officer on account of commission paid to foreign agents.
Briefly the facts are that the assessee, an Indian company, is a Government of India recognized Star Export House engaged in exporting cotton yarn. For the assessment year under dispute, the assessee filed its return of income declaring a total income of Rs. 21,03,080/-. During the assessment proceedings, the Assessing Officer found that the assessee claimed a deduction of Rs. 1,36,71,242.13 on account of commission paid to foreign agents for booking export orders. The Assessing Officer was of the view that the assessee was required to deduct tax at source u/s. 195 of the Act while paying commission to the foreign agents. Since the assessee failed to do so, the Assessing Officer proposed to disallow the deduction claimed.
In response, the assessee contended that the commission was paid to foreign agents for services rendered outside India, and these agents had no permanent establishment or business connection in India. Therefore, such payments could not be considered as income chargeable to tax in India, making the provisions of section 195 inapplicable. Despite these submissions, the Assessing Officer disallowed the deduction, relying on the Supreme Court ruling in GVK Industries vs. ITO 332 ITR 130 (SC), which held that commission paid to foreign agents for obtaining export orders is taxable in India. Consequently, the assessee was liable to deduct tax at source under section 9(1)(i)/9(1)(vii) r.w.s. 195. The Assessing Officer also noted that similar disallowances in the assessee's case for previous years were deleted by the Tribunal, but he chose not to follow the Tribunal's decision as the department had appealed to the High Court.
The assessee appealed against the disallowance to the Commissioner of Income Tax (Appeals), who noted that the Tribunal had deleted similar disallowances in the assessee's case for previous years and followed the same reasoning to delete the addition for the impugned assessment year.
The Departmental Representative argued that the payments to foreign agents, although for procuring orders outside India, were taxable in India as the work was executed in India, relying on the Supreme Court decision in GVK Industries. He contended that the source rule applied, making the payments taxable in India under section 9(1)(vii)(b) and the Explanation to section 9(2).
The Authorized Representative for the assessee argued that the payments were made to agents located outside India who rendered services in their respective countries, having no business connection or permanent establishment in India. He emphasized that under section 195, tax is required to be deducted at source only if the payment is chargeable to tax in India, which was not the case here. He also pointed out that the Tribunal had consistently deleted similar disallowances in the assessee's case for previous years.
Upon careful consideration, the Tribunal noted that the Assessing Officer accepted that the commission was paid to foreign agents for booking export orders. The Tribunal referred to section 5, which defines the scope of total income, and section 9, which deals with income deemed to accrue or arise in India. It highlighted that the non-resident agents did not have any business connection in India as defined under Explanation 2 to section 9(1)(i), and the payments were not chargeable to tax in India. The Tribunal also noted that the Assessing Officer's reliance on the Supreme Court decision in GVK Industries was misplaced as the facts of the present case were different. In GVK Industries, the payment was for technical services, whereas in the present case, it was purely for commission/brokerage for procuring export orders.
The Tribunal concluded that the provisions of section 195 were not applicable as the commission paid to non-resident agents was not chargeable to tax in India. The Tribunal upheld the Commissioner of Income Tax (Appeals)'s order and dismissed the department's appeal.
Before parting, the Tribunal observed that other decisions referred to by the Assessing Officer were not applicable to the present case and thus did not discuss them in detail.
In the result, the Revenue's appeal was dismissed.
Order pronounced in the open court on 11.05.2018
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