2016 (9) TMI 107 - AT - Income Tax

Non-resident commission expenses not taxable in India under IT Act

Income Tax Officer, Ward 2 (1) (1), Ahmedabad Versus Excel Chemicals India Limited and Vica-Versa

The ITAT upheld the CIT(A)'s decision to delete the disallowance of commission expenses under section 40(a)(i) of the Income Tax Act, 1961. It was found ... TDS u/s 195 - Disallowance of commission expenses under section 40(a)(i) - taxability of a non-resident in respect of “income accruing or arising or deemed to accrue or arise, in India - Held that:- For application of Section 195, it is sine qua non that the payment to no- resident must have an element of income liable to be taxed under the Indian Income Tax Act, 1961. On the facts of this case, as we have already concluded, no part of the remittance to the commission agent was taxable in India. The assessee was, therefore, not under any obligation, on the facts of this case, to deduct any tax at source from the commission payments to the non-residents. Since there was no obligation to deduct tax at source, the very foundation of impugned disallowance under section 40(a)(i) ceases to hold good in law. Learned CIT(A) was, therefore, quite justified in deleting the impugned disallowance. We uphold his action, and dismiss the grievance raised by the Assessing Officer. Issues:Challenge to order under section 143(3) of the Income Tax Act, 1961 for assessment year 2012-13 regarding disallowance of commission expenses under section 40(a)(i).Analysis:The Assessing Officer challenged the order of the CIT(A) regarding the disallowance of commission expenses under section 40(a)(i) of the Income Tax Act, 1961. The Assessing Officer contended that the commission paid to non-resident entities without tax withholding should be disallowed. The Assessing Officer relied on the deeming fiction under section 9(1)(i) and the ruling of the Authority for Advance Ruling in a similar case to support the taxability of commission income in India. However, the CIT(A) deleted the disallowance, stating that the income was not taxable in India as no operations were carried out in India by the non-resident entities. The CIT(A) also distinguished the AAR rulings cited by the Assessing Officer. The Assessing Officer appealed the decision.Upon thorough consideration, the ITAT found that the Assessing Officer's interpretation of the deeming fiction under section 9(1)(i) was flawed as it did not consider Explanation 1 to the same section. The ITAT concluded that since no business operations were conducted in India by the non-resident entities, the income was not taxable in India. The ITAT disagreed with the AAR rulings cited by the Assessing Officer, emphasizing that the commission income was outside the ambit of income deemed to accrue or arise in India. The ITAT upheld the CIT(A)'s decision to delete the disallowance under section 40(a)(i).Furthermore, the ITAT analyzed the application of Section 195 regarding tax deduction at source, emphasizing that it is essential for the payment to a non-resident to have an element of income liable to be taxed in India for the section to apply. Since, in this case, no part of the remittance to the non-resident entities was taxable in India, there was no obligation to deduct tax at source. Therefore, the foundation of the disallowance under section 40(a)(i) was deemed invalid. The ITAT dismissed both the appeal and the cross objections, upholding the CIT(A)'s decision to delete the disallowance.In conclusion, the ITAT upheld the CIT(A)'s decision, emphasizing that the non-resident commission agents were not taxable in India, and there was no obligation to deduct tax at source from the commission payments to non-residents. The appeal and cross objections were dismissed.