2019 (9) TMI 764 - AT - Income Tax

Assessee's Appeals Granted: TDS Disallowance Deleted, Interest Impacted

M/s JLC Electromet Pvt. Ltd. Versus ACIT, Circle-4, Jaipur

The Tribunal allowed both appeals filed by the assessee, directing the deletion of disallowances made under Section 40(a)(ia) for non-deduction of TDS on ... TDS u/s 195 - payment of selling commission, exhibition expenses and testing expenses to various non-resident entities, without deducting tax at source - PE in India - HELD THAT:- Section 195 (1) provides that any person responsible for paying to a non-resident, not being a company or to a foreign company, any interest or any other sum chargeable under the provisions of this Act shall deduct income tax thereon at the rates in force. Therefore, what needs to be examined in the instant case is whether the payment of commission and other charges are chargeable under the provisions of this Act. In Explanation 2, it has been clarified that the obligation to comply under sub-section (1) to make deduction applies to all person resident or non-resident whether or not the non-resident has a residence or place of business or business connection in India or any other presence in any manner whatsoever in India. We therefore find that the explanation 2 to section 195 talks about the person who is making/crediting the payment rather than the person who is receiving the payment as the obligation to comply with sub-section (1) is on the person who has to deduct tax at source while making or crediting the payment to the account of the payee. The explanation provides that the obligation to deduct tax at source applies to all persons but it doesn’t and cannot take away the fundamental requirement under law which is that the sum has to be chargeable under the provisions of the Act and therefore, only in a scenario, the sum is chargeable under the Act, the obligation is cast on all persons to deduct tax at source irrespective of the residential status or business connection or presence in India. We therefore find that reading of the said explanation by the lower authorities is not correct and only in a scenario, the payment is chargeable to tax, the tax is required to be deducted at source. Coming to the provisions of section 40(a)(ia) of the Act, the said section also provides that any interest, royalty, fees for technical services or other sum chargeable under this Act on which tax is deductible at source under chapter XVII-B and such tax has not been deducted or after deduction has not been paid on or before the due date specified in section 139(1). We therefore find that both the provisions of section 195(1) as well as 40(a)(ia) of the Act talks about deduction of tax at source where the sum is chargeable under this Act. In the present case, undisputed facts are that the commission has been paid to various non-resident entities in respect of sales affected by the assessee outside of India, the services have been rendered outside of India and the payments have been made outside of India. In light of these undisputed facts, the legal proposition laid down in the aforesaid decision equally applies in the instant case and such commission payment cannot be held chargeable to tax in India. Similarly the exhibition expenses have been paid in respect of participation in various exhibitions held outside of India and even the testing charges have been paid for testing services outside of India. Therefore, these payments will not fall in the category of income which has accrued or arisen or deemed to accrued or arise in India. Further, payments have been made outside of India. Accordingly, we are of the considered view that there was no liability to deduct tax at source u/s 195(1) as these payments are not chargeable to tax and the provisions of section 40(a)(ia) cannot be invoked in the instant case. Disallowance made by the Assessing officer is directed to be deleted - Decided in favour of assessee. Issues Involved:1. Jurisdiction and validity of additions and disallowances made under Section 143(3).2. Disallowance under Section 40(a)(ia) read with Section 195 for non-deduction of TDS on payments made to non-residents.3. Charging of interest under Sections 234B and 234C.Detailed Analysis:1. Jurisdiction and Validity of Additions and Disallowances:The assessee challenged the jurisdiction and validity of the additions and disallowances made under Section 143(3) for both AY 2013-14 and AY 2014-15. The assessee argued that the impugned additions and disallowances are bad in law and on facts due to lack of jurisdiction and other reasons.2. Disallowance under Section 40(a)(ia) read with Section 195:The primary issue was the disallowance of expenses under Section 40(a)(ia) read with Section 195 for non-deduction of TDS on payments made to non-residents. The assessee made payments towards Selling Commission, Exhibition Expenses, and Testing Expenses to various non-resident entities without deducting tax at source. The Assessing Officer (AO) disallowed these expenses based on the insertion of Explanation 2 to Section 195 by the Finance Act, 2012, with retrospective effect from 01.04.1962.The AO argued that the assessee was liable to deduct TDS on these payments as per Section 195, and since the assessee failed to do so, the expenses were disallowed under Section 40(a)(ia). The CIT(A) confirmed the AO's findings, stating that the appellant was required to deduct tax at source on the payments made to non-residents, irrespective of whether the non-residents had a place of business or business connection in India.The assessee contended that the payments were made for services rendered outside India, and thus, no income accrued or arose in India. The assessee provided detailed evidence, including ledger accounts, agency agreements, certificates from payees, and bank transaction advices, to support their claim that the services were rendered and payments were made outside India.The Tribunal noted that the AO and CIT(A) did not dispute the nature of the payments or the fact that the services were rendered outside India. The Tribunal held that the obligation to deduct tax under Section 195 arises only if the payment is chargeable to tax in India. Since the payments were not chargeable to tax in India, the assessee was not liable to deduct TDS, and thus, the disallowance under Section 40(a)(ia) was not justified.3. Charging of Interest under Sections 234B and 234C:The assessee also challenged the charging of interest under Sections 234B and 234C. The CIT(A) had confirmed the charging of interest, which the assessee argued was contrary to the provisions of law and facts. The Tribunal's decision to delete the disallowance under Section 40(a)(ia) would also impact the interest charged under Sections 234B and 234C, as the basis for the interest calculation would change.Conclusion:The Tribunal allowed both appeals filed by the assessee, directing the deletion of disallowances made under Section 40(a)(ia) for non-deduction of TDS on payments to non-residents. The Tribunal concluded that the payments were not chargeable to tax in India, and thus, the assessee was not liable to deduct TDS. Consequently, the interest charged under Sections 234B and 234C was also impacted. The Tribunal's decision was based on a thorough examination of the facts, evidence, and relevant legal provisions, ensuring that the assessee's claims were adequately addressed.