Tribunal upholds deletion of income, reverses addition, clarifies non-taxability of foreign commission payments

The Tribunal dismissed the Revenue's appeal and allowed the assessee's cross-objection. The deletion of Rs. 1,19,87,105/- was upheld, and the addition of Rs. 2,59,250/- was reversed. The Tribunal emphasized that commission payments to non-residents for services rendered outside India are not taxable in India, and non-deduction of TDS in such cases does not warrant disallowance under Section 40(a)(ia).

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Issues Involved:
1. Deletion of addition made by A.O. on account of non-deduction of TDS u/s 40(a)(ia) of the I.T. Act on Contract Payment and Commission.
2. Confirmation of addition of disallowance u/s 40(a)(ia) of the I.T. Act for non-deduction of TDS on payments covered by Section 194C of the I.T. Act.

Issue-wise Detailed Analysis:

1. Deletion of Addition for Non-Deduction of TDS u/s 40(a)(ia):

The Revenue appealed against the deletion of Rs. 1,19,87,105/- by the CIT(A), which was added by the Assessing Officer (A.O.) due to non-deduction of TDS on contract payment and commission. The A.O. had disallowed this amount because the assessee did not obtain the necessary order from the A.O. before transferring the commission to a non-resident in Dubai. The A.O. argued that the commission paid to the non-resident was income deemed to accrue or arise in India, thus necessitating TDS deduction.

The assessee countered that the commission was paid to an NRI for services rendered outside India, with no business connection or property in India, and thus not taxable in India under Section 9(1) of the I.T. Act. The assessee further argued that the withdrawal of old CBDT Circulars did not alter the taxability of such payments, as circulars cannot override statutory provisions.

The Tribunal noted that the CIT(A) had considered RBI guidelines and CBDT Circulars, and the issue was similarly addressed in the case of Divya Creation Vs. ACIT, where it was held that commission payments to non-residents for services rendered outside India are not taxable in India. The Tribunal referenced several judgments, including the Supreme Court's decision in CIT Vs. Toshoku Ltd., which held that commission earned by non-residents for services rendered outside India could not be deemed to accrue or arise in India.

2. Confirmation of Addition for Non-Deduction of TDS u/s 40(a)(ia):

The assessee filed a cross-objection against the confirmation of Rs. 2,59,250/- disallowed by the CIT(A) for non-deduction of TDS on payments covered under Section 194C of the I.T. Act. The Tribunal referred to the jurisdictional High Court decisions in CIT Vs. Rajinder Kumar and Naresh Kumar, which held that if no proceedings are initiated against the assessee under Section 201(1A), implying the assessee is not treated as 'assessee in default,' no addition could be made for failure to deduct tax. The Tribunal also noted that the second proviso to Section 40(a)(ia) inserted through the Finance Act 2012 is retrospective and applies to old cases as well.

Conclusion:

The Tribunal dismissed the Revenue's appeal and allowed the assessee's cross-objection. The deletion of Rs. 1,19,87,105/- was upheld, and the addition of Rs. 2,59,250/- was reversed. The Tribunal emphasized that commission payments to non-residents for services rendered outside India are not taxable in India, and non-deduction of TDS in such cases does not warrant disallowance under Section 40(a)(ia).

Order Pronounced:

The appeal filed by the Revenue is dismissed, and the cross-objection filed by the assessee is allowed. The order was pronounced in the Open Court on 24th July 2018.

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