2026 (2) TMI 311 - AT - Income Tax

TDS on commission payments to foreign agents held unnecessary where income not taxable in India; disallowance avoided

Commission paid to foreign agents for selling goods outside India was treated as not accruing or arising in India under the cited precedent, so such ... TDS u/s 195 - Disallowance u/s 40(a)(i) - commission payment which includes provision for commission to foreign agents - contention of the assessee is that no tax was deductible u/s 195 of the Act on the payments made by it to the foreign agents for the reason that the services being rendered outside India, the payments were not chargeable under the Act HELD THAT:- As decided in Vedanta Limited. [2023 (1) TMI 72 - SC ORDER] since the non-resident agents were carrying on business of selling Indian goods outside India, commission so earned by them could not be said to be income which had accrued and/or arisen in India and, thus, the assessee was not liable to deduct TDS on payment of commission and demurrage The contention of the assessee that the commission paid by the assessee to the foreign agents was not chargeable to tax in India was not controverted by the Revenue. No finding was given that the foreign agents had rendered any service in India or that the payments made to then was chargeable to tax in India for any other reason. Once the income is not chargeable to tax in India, the question of deducting TDS thereon under the provision of section 195 of the Act and disallowance of the entire payment under the provisions of section 40(a)(i) of the Act does not arise. Decided in favour of assessee. Issues: Whether disallowance under section 40(a)(i) of the Income-tax Act, 1961 is sustainable in respect of commission payments to foreign agents where no TDS was deducted, i.e., whether tax was deductible under section 195 because the payments were chargeable to tax in India.Analysis: Section 40(a)(i) permits disallowance only where tax is deductible at source on a payment chargeable under the Act and such tax has not been deducted. The legal precondition for a TDS obligation under section 195 is that the remittance be a sum chargeable to tax in India as determined by sections 4, 5 or 9. The Assessing Officer made the disallowance without examining or recording a finding that the commission payments to foreign agents were chargeable to tax in India. Earlier decisions of this Tribunal and higher courts establish that commission paid to non-resident agents for services rendered and utilised outside India is not chargeable to tax in India, and therefore section 195 and section 40(a)(i) do not apply. The Revenue did not controvert the assessee's primary contention that the commission was not chargeable to tax in India, nor was there any finding that services were rendered in India or income arose in India.Conclusion: Disallowance under section 40(a)(i) cannot be sustained because the prerequisite that the payments were chargeable to tax in India (and thus liable to deduction under section 195) was not established; appeal dismissed and result is in favour of the assessee.