2017 (11) TMI 2074 - AT - Income Tax

Section 195 applies only when payment is taxable in India; foreign export commission not taxable under s.9(1)(vii), no TDS.

ITAT MUMBAI - AT held that s.195 applies only if the payment to a non-resident is chargeable to tax in India; if not chargeable, TDS is not required. The ... TDS u/s 195 - disallowance u/s 40(a)(i) - assessee has paid commission on export sales to foreign entity - HELD THAT:- The provisions of Section 195 could be applied to the assessee provided the impugned payments, at the first instance, were chargeable to tax in India. If the same are not chargeable to tax in India, the same do not attract TDS provisions. This view of ours is fortified by the judgment of GE India Technology Centre (P) Ltd. [2010 (9) TMI 7 - SUPREME COURT] where the Hon’ble court has held that if the income is not chargeable to tax in India, there is no liability of TDS u/s 195 of the Income Tax Act. Therefore, in order to determine the applicability of the provisions of Section 195, it is first essential to find out whether the sum paid to non-resident is chargeable to tax as per the statutory provisions or not. If the impugned payments are not chargeable to tax, the provisions of Section 195 are not attracted to the same. We find that the assessee has paid commission on export sales to foreign entity which does not have any permanent establishment in India and the services are rendered outside India. The said payment could not be terms as Managerial / Professional / Technical services within the meaning of Section 9(i)(vii). This view is fortified by the judgment of EON Technology (P) Ltd. [2011 (11) TMI 20 - DELHI HIGH COURT] The commission paid by the assessee, in the first instance, was not chargeable to tax in the hands of the payee and therefore, did not require any TDS u/s 195. Therefore, we are inclined to confirm the stand of Ld. CIT(A) and dismiss the revenue’s appeal. ISSUES PRESENTED AND CONSIDERED 1. Whether commission paid to a non-resident commission agent for services performed outside India is 'chargeable to tax in India' such that the payer is obliged to deduct tax at source under section 195 of the Income-tax Act. 2. Whether failure to deduct tax at source on such foreign commission attracts disallowance of the expenditure under section 40(a)(i) (noted in records as 40(a)(ia)). ISSUE-WISE DETAILED ANALYSIS Issue 1 - Applicability of section 195 to commission paid to a non-resident agent for services rendered outside India Legal framework: Section 195 mandates TDS where any person is liable to pay to a non-resident any sum 'chargeable under the provisions of the Act.' Section 9 deals with income deemed to accrue or arise in India (including business connection/PE related rules). Explanation to section 195 and CBDT Instruction No.2/2014 (26-02-2014) clarify that only the portion of a payment that is chargeable to tax in India attracts TDS; the appropriate proportion is to be determined on facts. Precedent treatment: The Court relied upon the Supreme Court decision interpreting 'any other sum chargeable under the provisions of the Act' to mean that TDS obligation arises only if the payment is chargeable to tax in India. The Delhi High Court decision endorsing that export commission to a non-resident agent operating outside India does not attract section 195 was followed. A contrary decision was distinguished where the commission right arose in India because orders were executed in India. Interpretation and reasoning: The Tribunal examined facts: the non-resident agent operated from abroad, had no PE or business operations in India, performed services outside India in respect of exports, and the agent's commission was deducted abroad from invoice value with the net remitted to the payer. On these facts the income of the non-resident did not accrue or arise in India under section 9. Consequently, there was no sum 'chargeable' to tax in India and section 195 could not be invoked. The Tribunal also applied CBDT Instruction No.2/2014 which requires determination of the appropriate portion chargeable to tax; here that portion is nil. Ratio vs. Obiter: Ratio - Section 195 applies only to sums chargeable to tax in India; where non-resident commission arises and is received abroad and no part is chargeable under section 9, no TDS obligation under section 195 arises. Distinguishing observations about factual differences with cases where orders executed in India are obiter in relation to this case but operative for future fact-sensitive comparison. Conclusion: The commission paid for services rendered abroad to a non-resident without PE or business connection in India was not chargeable to tax in India; therefore no liability to deduct tax under section 195 arose. Issue 2 - Disallowance under section 40(a)(i) for failure to deduct TDS on such foreign commission Legal framework: Section 40(a)(i) disallows expenditure where TDS was required but not deducted; its applicability depends on existence of a TDS obligation under section 195. Precedent treatment: The Tribunal relied on the same Supreme Court and High Court authorities (as above) and CBDT Instruction No.2/2014 which guide that disallowance can follow only where a payment is chargeable to tax and the appropriate portion has been determined but not deducted. Interpretation and reasoning: Because the commission was not chargeable to tax in India (Issue 1 conclusion), there was no statutory obligation to deduct tax; absence of TDS therefore cannot attract disallowance under section 40(a)(i). The AO's reliance on decisions where facts established the right to receive commission in India was distinguished as factually inapposite. Ratio vs. Obiter: Ratio - Disallowance under section 40(a)(i) cannot be applied where no TDS obligation exists because the payment is not chargeable to tax in India. Distinguishing factual scenarios where income is chargeable to tax (e.g., orders executed / services rendered in India) is explanatory and will govern different fact patterns. Conclusion: The disallowance under section 40(a)(i) in respect of the foreign commission was not justified and was deleted. Cross-references and Practical Observations 1. The determinations under section 195 and section 40(a)(i) are fact-sensitive; key factual determinants include where services were rendered, whether the non-resident has a PE or business connection in India, and where the commission right/receipt arises. 2. CBDT Instruction No.2/2014 mandates that, where TDS has not been deducted, the assessing officer determine the appropriate proportion chargeable to tax on the facts; where that proportion is nil, neither TDS nor disallowance is appropriate. Final Disposition The Court confirms the first appellate authority's reasoning that the foreign commission was not chargeable to tax in India and consequently there was no obligation to deduct tax under section 195; therefore the disallowance under section 40(a)(i) is not sustainable and is deleted. The revenue's appeal is dismissed.