2016 (6) TMI 260 - AT - Income Tax

Non-resident agents not liable for TDS on commission income ruling

The tribunal ruled in favor of the assessee, holding that the Explanation 2 to section 9(1)(i) of the Income Tax Act did not apply when non-resident ... TDS u/s 195 - commission income earned by non-resident agents - applicability of DTAA - existence of PE in India - Held that:- In the present case, the non-resident commission agent is carrying out business outside India on behalf of resident assessee and therefore, in our considered opinion, this Explanation 2 to section 9(1) (i) is not applicable in the present case. Examining the applicability of DTAA between India and various countries i.e., Qatar, South Africa, Spain, USA, Singapore and Argentina. Article 7 in the DTAAs regarding business profits is similar in all these DTAAs and as per the same, profits of an enterprise of a contracting State shall be taxable only in that State, unless the enterprise carries on business in the other contracting States through a PE situated therein. Therefore, in the absence of a finding that commission agents are having PE in India as per Article 7 of DTAAs between India and these countries, the business profit of commission agents cannot be brought to tax in India and as per section 90(2), if DTAA is more beneficial than the domestic laws, then DTAA has to prevail. Thus commission payment made by the assessee to these commission agents outside India for procuring export orders cannot be brought to tax in India and as a consequence, TDS is not deductible - Decided in favour of assessee. Issues:- Validity of action taken by the Assessing Officer based on Explanation 2 to section 9(1)(i) of the Income Tax Act.- Applicability of Double Taxation Avoidance Agreements (DTAA) between India and various countries.- Interpretation of business profits under Article 7 of the DTAAs.- Taxability of commission payment made by the assessee to non-resident commission agents.- Whether TDS is deductible on commission payments made to non-resident agents.Validity of Action Taken by the Assessing Officer:The Assessing Officer (AO) proceeded based on Explanation 2 to section 9(1)(i) of the Income Tax Act, which defines business connection to include activities carried out through a person acting on behalf of a non-resident. However, it was argued that this explanation is not applicable when non-resident agents are conducting business outside India on behalf of a resident assessee. The tribunal agreed that the explanation did not apply in this case.Applicability of Double Taxation Avoidance Agreements:The tribunal examined the DTAA between India and various countries such as Qatar, South Africa, Spain, USA, Singapore, and Argentina. Under Article 7 of these DTAAs, business profits are taxable only in the contracting State unless the enterprise operates through a Permanent Establishment (PE) in the other State. Since there was no evidence of the commission agents having a PE in India, the tribunal held that the commission income of non-resident agents could not be taxed in India. Additionally, as per section 90(2) of the Income Tax Act, if the DTAA is more beneficial, it prevails over domestic laws.Taxability of Commission Payments:The tribunal considered the nature of commission payments made by the assessee to non-resident agents for procuring export orders. It was concluded that these payments did not attract tax liability in India based on the provisions of the DTAAs and the absence of a PE in India for the agents. Therefore, the commission income earned by non-resident agents was not subject to taxation in India.TDS on Commission Payments:Given the finding that the commission income of non-resident agents was not taxable in India, the tribunal ruled that Tax Deducted at Source (TDS) was not applicable on these commission payments. The tribunal allowed all appeals filed by the assessee, overturning the orders of the revenue authorities.This judgment highlights the importance of analyzing the applicability of tax laws and international agreements in determining the tax liability of non-resident agents receiving commission payments. The tribunal's detailed examination of the provisions of the Income Tax Act and the relevant DTAAs demonstrates a thorough consideration of legal principles to arrive at a decision favorable to the assessee.