DCIT, CIRCLE 8, PUNE, PUNE vs. ASHISH AGARWAL, PUNE

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ITA 1582/PUN/2025Status: DisposedITAT Pune20 May 2026AY 2020-2110 pages
AI SummaryDismissed

What did the Tribunal hold?

The Tribunal upheld the CIT(A)'s decision, finding that since the services were rendered outside India by entities not having a Permanent Establishment in India, the income did not accrue or arise in India, and thus Section 195 was not applicable.

What were the facts?

The Revenue appealed against the deletion of disallowances made under Section 40(a)(i) of the Income Tax Act. The assessee had made payments to foreign entities without deducting TDS, classifying them as commission for services rendered outside India.

What were the issues?

Whether TDS was required on payments made to foreign entities for services rendered wholly outside India, and if not deducted, whether such expenses are disallowable under Section 40(a)(i).

Which sections of the Income-tax Act were involved?

Section 40(a)(i),Section 195,Section 9

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, PUNE BENCH “C”, PUNE

Before: SHRI Dr. DIPAK P. RIPOTE & SHRI VINAY BHAMORE

For Appellant: Shri Nikhil Pathak
For Respondent: Shri Prakash L. Pathade, CIT-DR

PER Dr. DIPAK P. RIPOTE, A.M : This is an appeal filed by the Revenue against the order of the Learned Commissioner of Income Tax (Appeals), Pune-13 [Ld.CIT(A)], passed u/s. 250 of the Income Tax Act, 1961 (‘the Act’) for AY 2020-21 on 05-04-2025, emanating from the Assessment Order u/s 143(3) r.w.s. 144B of the Act, dated 08-09-2022.

2.

The Revenue has raised following grounds of appeal : 1. On the facts and in the circumstances of the case and in law the Ld. CIT(Appeals)-13 Pune, erred in deleting the disallowances u/s. 40a(i) of the IT Act. 1961 even when there is an express provision stipulated in section 195 of the IT Act, 1961 and that the assessee chose to circumvent the said provisions to make payments to the foreign entities without deducting tax at source. 2. On the facts and in the circumstances of the case and in law the Ld.CIT(Appeals) -13 Pune, erred in deleting the disallowances u/s. 40a(i) of the IT Act even when there is an express provision stipulated in section 195 of the IT Act and that the assessee chose to circumvent the said provisions and not to seek an NOC from the concerned Assessing Officer, to decide whether or not TDS is to be made at a lower deduction or at Nil rate.

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3.

On the facts and in the circumstances of the case and in law the Ld.CIT (Appeals) -13 Pune, erred in deleting the disallowances u/s. 40a(i) of the IT Act without appreciating that the right to receive the commission arises in India when the order is executed in India. 4. On the facts and in the circumstances of the case and in law the Ld.CIT(Appeals) -13 Pune, erred in deleting the disallowances u/s. 40n(i) of the IT Act, without appreciating the fact that documents that the assessee relics on, not only casts doubts on the genuinity of the transactions but also makes it clear that the said documentation has been made in order to avoid and take shelter for non-deduction of TDS on a huge amount that has been booked under the garb of commission. 5. On the facts and in the circumstances of the case and in law the Ld.CIT(Appeals) -13 Pune, erred in not appreciating the fact that the assessee has not deducted tax at source on the payments made to foreign entities inspite of the specific amendment to section 195 vide Finance Act, 2012.

3.

Submission of Ld.DR: The Ld.DR relied on the order of the AO. The Ld.DR submitted that payments made by the assessee outside India were in the nature of FTS though classified by the assessee as commission. Ld.DR submitted that therefore, it is mandatory for the assessee to deduct TDS. Accordingly, Ld.DR submitted that order of the AO may be upheld. Ld.CIT-DR took us to the chart appearing in the assessment order which gives the list of the entities to whom assessee had made payments outside India. During the hearings, Bench specifically asked the Ld.DR whether any order u/s. 201 of the Act has been passed or not; Ld.DR confirmed that no action u/s. 201 of the Act has been taken by the AO or ITO(TDS). Bench specifically asked the Ld.CIT-DR how ground No.4 is emanating from assessment order, as AO had never doubted genuineness of the payments. The Ld.CIT-DR could not answer the question.

4.

Submission of Ld.AR: Ld.AR filed a paper book which gives list of documents filed by the assessee during the assessment proceedings. Ld.AR submitted that section 195 of the Act will be applicable only if the impugned amounts were income of those entities. However, in this case, all the entities are situated out side India. The payments were made outside India. They do not have any PE in India. Ld.AR invited our attention to para 15.2 of the assessment order wherein AO himself has admitted that agents rendered services abroad, in the form of soliciting the orders and commission was remitted to the agents out side India. Ld.AR took us through the section 9

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of the Act to demonstrate that income was not accruing or arising in India. Therefore, section 195 is not applicable. Ld.AR also referred to the agreements which are at pg. No. 85-90 of the paper book to derive the point that services were rendered outside India. A certificate was filed that none of the entities have PE in India. Ld.AR submitted that identical commissions were paid to the same parties for earlier years, but no such disallowance was made by the AO.

5.

Ld.AR relied on the following: i. ACIT vs. Kapoor Industries Ltd., [2021] 125 taxmann.com 271 (Delhi-Trib.); ii. PCIT vs. Sesa Goa Ltd., [2023] 146 taxmann.com 35 (Bombay); iii. ACIT vs. Manoj Raizada [2023] 154 taxmann.com 54 (Delhi-Trib.)

6.

Findings and analysis: We have heard both the parties and perused the records. Assessee is an individual filed his original return of income on 29-11-2020, declaring total income at Rs.21,10,85,690/-. Assessee then revised the return on 04-03-2021 declaring total income at Rs.21,10,85,690/-. Assessee’s case was selected for scrutiny. The AO issued notice u/s. 143(2) of the Act on 29-06-2021. Subsequently, the AO issued notices u/s. 142(1) and show cause notice which were complied by the assessee. Assessee is a proprietor of M/s. Bharat Tanks and Vessels, engaged in the business of design, manufacturing, assembly and installation of tanks and vessels for storage, transportation of oil, gas and chemicals and activities allied thereto. During the hearings, the AO observed that assessee had made payments outside India of Rs. 21,20,55,594/- without deducting TDS. AO disallowed the amount of Rs.21,20,55,594/- u/s. 40(a)(i) of the Act. The relevant paragraphs i.e., 16.1& 20 of the assessment order are reproduced here as under: “16.1 The assessee took plea that the customers are resident of foreign countries. The facts of the assessee although correct, but it does not to non making of TDS on the payment so made abroad. After amendment of section 195 vide finance Act, 2012 although payees are not resident of foreign countries, but, the deductor should have deducted tax at source. As the assessee violates the provisions of this section, therefore, the expenses can't be allowed as per provisions of section 40(a)(i)(A) of the Act as the same can

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only be allowed when the assessee has duly made TDS on the expenses claimed in the books of accounts. 20. From the above discussion the assessee is duty bound to deduct tax at source for the payments made to non-residents at the appropriate rates as provided under these provisions. The assessee cannot escape the liability for doing so unless a certificate from concerned jurisdictional officer is obtained for the deduction of the tax either at a rate lower than the rate as prescribed or for non-deduction of tax at source and that the duty of the assessee ends there only and is not required to examine and look into other aspects beyond this like whether the assessee/payer received the services from the non- resident to whom such payments were made or from some other person through the non-resident, whether such receipt in the hands of the recipient non-resident would be his income or part of it would be his income on which he is liable to pay tax. The assessee/ payer is not expected to step into the purview of the Assessing Officer for examining whether the receipts in the hands of the recipient is income or not whether he is liable to pay tax thereon or not. More so when the deduction of the tax at source under section 195 is subject to regular assessment and the right of non-resident is not adversely affected because at the time of regular assessment if the payee/recipient succeeds in proving before the Assessing Officer that such receipts, from the payer/assessee, were not its income and so it was not bound to pay tax thereon then such tax deducted at source by the payer/assessee and deposited with the Government is bound to be refunded or adjusted against the payment of tax, if any, to the payee/recipient non- resident.”

7.

Aggrieved by the assessment order, the assessee filed appeal before the Ld.CIT(A), the relevant paragraphs of order of the Ld.CIT(A) are reproduced as under:

The decision in CIT v. Toshoku Ltd. provides a strong precedent that income for services rendered wholly outside India by a non-resident with no Indian business presence is not taxable in India under Section 9. While the Explanation to Section 9(2) broadens the scope of deemed accrual of income for "fees for technical services", the Appellant's case pertains to non-technical services. The general principles of territorial nexus and the source of income continue to be relevant for such services. Furthermore, the rulings in Device Driven and Lufthansa Cargo regarding the exceptions in Section 9(1)(vii) (b) (even though for technical services) indicate a legislative intent to exclude income related to foreign business and income sources from deemed accrual in India. This underlying principle supports the Appellant's argument that payments for non-technical services utilised for a foreign income-generating project should not be subjected to TDS in India. The Hon'ble Madras High Court's observation in Farida Leather that the TDS obligation is contingent on the recipient's tax liability in India is particularly relevant here. The AO has failed to establish that the non-resident recipients of the payments for non-technical services had a tax liability in India concerning this income. In light of the above analysis, I hold that the Assessing Officer has erred in disallowing the expenses under Section 40(a)(i) solely on the ground of non- deduction of TDS, without establishing that the income derived by the non- resident service providers from the non-technical services was chargeable to tax in India.

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The disallowance of Rs. 4,39,16,585 under Section 40(a)(i) of the Income Tax Act, 1961, in respect of payments made to non-resident suppliers of non- technical services on the foreign site, is directed to be deleted. The AO's reliance on Transmission Corp. of A.P.Ltd. and Headstart Business Solutions pertains to the obligation to deduct tax on any sum chargeable under the Act and the availability of Section 195(2) to determine the taxable portion. However, these cases do not negate the specific exceptions provided within Section 9 itself for income that is not deemed to accrue or arise in India. If the income in the hands of the non-resident is not chargeable to tax in India due to the exception in Section 9(1)(vii)(b), then the obligation to deduct TDS under Section 195 does not arise in the first place, as held by the Hon'ble Supreme Court in GE India Technology Centre (P) Ltd. vs. CIT & Anr. [(2010) 327 ITR 456 (SC)]. Section 195 casts a liability to deduct tax only on sums chargeable under the Act. Similarly, while Van Oord ACZ India (P.) Ltd. highlights the payer's duty to deduct TDS or seek a certificate under Section 195(2), this obligation presupposes that the payment is chargeable to tax in India. If the payment falls under a specific exception and is not deemed to accrue or arise in India, this duty does not exist. The decision itself acknowledges that the assessee would not be in default if the recipient's income is ultimately held not to be chargeable to tax. The decision of the Hon'ble Delhi High Court in Lufthansa Cargo provides a direct precedent. The Court held that payments made to non-residents for repairs of aircraft, which were used for earning income primarily from sources outside India, fell within the exclusionary clause of Section 9(1)(vii) (b) and were not chargeable to tax in India. This principle is analogous to the present case, where the technical services are utilised for a project that is a source of income outside India. I find that the payments made by the Appellant for technical services utilised at their foreign project site, which constitutes a source of income outside India, are not deemed to accrue or arise in India. Therefore, considering the specific exception provided in Section 9(1)(vii)(b), the clarification by the Supreme Court in GVK Industries, and the ratio of the Lufthansa Cargo case, there was no obligation on the Appellant to deduct TDS under Section 195 of the Act on these payments. Consequently, the disallowance under Section 40(a)(i) for non-deduction of TDS is therefore not warranted. The disallowance of Rs. 18,14,259 under Section 40(a)(i) of the Income Tax Act, 1961, in respect of payments made to non-resident suppliers of technical services on the foreign project site, is directed to be deleted.”

8.

Section 195 of the Income Tax Act 1961 is reproduced here under : Other sums. 195.(1) Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest (not being interest referred to in section 194LB or section 194LC) or section 194LD or any other sum chargeable under the provisions of this Act (not being income chargeable under the head "Salaries") shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any

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other mode, whichever is earlier, deduct income-tax thereon at the rates in force : Provided that …….. Explanation 1.—For the purposes of this section, where any interest …………… Explanation 2.—For the removal of doubts, it is hereby clarified that the obligation to comply with sub-section (1) and to make deduction thereunder applies and shall be deemed to have always applied and extends and shall be deemed to have always extended to all persons, resident or non-resident, whether or not the non-resident person has— (i) a residence or place of business or business connection in India; or (ii) any other presence in any manner whatsoever in India. (2) Where the person responsible for paying any such sum chargeable under this Act (other than salary) to a non-resident considers that the whole of such sum would not be income chargeable in the case of the recipient, he may make an application 71[in such form and manner to the Assessing Officer, to determine in such manner, as may be prescribed], the appropriate proportion of such sum so chargeable, and upon such determination, tax shall be deducted under sub-section (1) only on that proportion of the sum which is so chargeable. (emphasis supplied)

Plain reading of section 195 makes it clear that the Section is applicable for sum chargeable under this act. Thus a person has to deduct Tax at Source provided the amount paid to other person is sum chargeable under the Income Tax Act.

9.

In the case of the Assessee, the Assessee has paid amounts out side India to persons situated outside India for the Services rendered outside India. The persons to who payment has been paid as Commission have no PE in India.

10.

In this case it is observed that Assessee vide letter dated 14-03-2022 had filed details of payments before the AO. The copy of the said Letter is at Page 40-54 of the Paper Book. It is noted that Assessee has paid Following Amounts:

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Assistance Services Abroad – Rs.2,97,06,910/- Commission Paid Abroad -Rs.16,63,24,750/- Rental Charges paid Abroad -Rs.1,42,09,675/- Professional fee- -Rs.12,08,105/- Testing Charges -Rs.6,06,154/-

11.

Assessee has paid Commission to following companies: Linaks Company Ltd Universal Engineering & Consultancy Services Ltd Frontline Building Materials Co LLC All the above mentioned entities are based in Ghana . They have filed certificate that they have received amounts outside India for the work done by them for Assessee outside India and They do not have any PE or business connection in India. The said certificates were filed before the AO and CIT(A). The copies are in the paper book.

12.

On perusal of the copies of Agreements entered with them it is noted that these companies have provided Assessee services related to the tender issued by one of the oil company in Ghana. Assessee has filed copies of these agreements before the AO and CIT(A). Assessee has filed copies in the paper book.

13.

Ld.DR has not doubted the facts mentioned that Services were provided in Ghana by the entities situated in Ghana.

13.1. Therefore, there is no merit in the assumption by Ld.AO that the Commission was FTS.

14.

Similarly the assessee has filed all the details related to payments made before the AO and CIT(A).

15.

In para 15.2 of the Assessment Order, the Assessing Officer has admitted that the Agents have rendered Services outside India .However, erroneously the AO mentioned that the Right to receive Commission arises in India when the order is executed by Assessee in India. We do not agree with the conclusion drawn by the AO. In this case the AO has admitted

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that Services were rendered outside India by the entities situated outside India in GHANA. The payments were received outside India by those entities. Aat page 104 of the paper book is the receipt issued by a company in Ghana for rental charges received for machinery on hire in Ghana. It is specifically mentioned that the Machinery was provided in Ghana. They have also filed certificate that they are not having any PE in India or business connection and the amounts were received in Ghana. Similraly at page 107,108 of the paper book is the receipt for professional fees paid in Ghana for an entity situated in Ghana. It has also filed certificate. The KYG Consultancy has provided services of Survey in Tema Ghana. The assessee has paid it in Ghana , It is not having any business in India. Thus, elaborate submission was made by the Assessee before the AO and CIT(A).

16.

Therefore, there is no accrual of income in India for impugned entities. Hence the impugned amount of Rs. 21,20,55,594/- is not sum chargeable to India Income Tax Act,hence section 195 will not be applicable .

17.

Therefore, we agree with the conclusion drawn by the Ld.CIT(A) that provisions of section 195 of the Act were not applicable to the payments made by assessee of Rs.21,20,55,594/-.

18.

We find support from following decisions.

18.1. Hon’ble Bombay High Court in the case of Pr.CIT vs Sesa Goa Ltd 146 taxmann.com35 (Bombay) Tax Appeal 68 of 2016 order dated 16-08- 2017 has held asunder : Quote, “ 5. These three questions are proposed as substantial questions of law : A. Whether on the facts and in the circumstances of the case, the Hon'ble ITAT is right in deleting theaddition of Rs. 5,07,06,761 u/s. 40(a)(ia) towards payment of commission of foreign agents where TDSwas not deducted ignoring the decision of AAR in the case of Rajiv Malhotra, In re [2006] 155 Taxman101/284 ITR 564/203 CTR 607 and SKF Boilers and Driers Pvt Ltd, wherein it was held

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that commissionpaid to export agents is taxable in India in view of sec.5(2)(b) r.w.s. 9(1)(i) of IT Act? ………………

7.

As regards proposed question A, this appears to us to be on a finding of fact. The question would not arisebecause the finding of the fact remained unchallenged. The question of TDS on commission income paid toforeign agents and the non-deduction of TDS is an issue fully covered by the decision of the Supreme Court inGE India Technology Centre (P.) Ltd. v. CIT [2010] 7 taxmann.com 18/193 Taxman 234/327 ITR 456/234CTR 153. There is, in addition, the decision of a Division Bench of this Court in CIT v. Gujarat Reclaim &Rubber Products Ltd. [2017] 79 taxmann.com 352/[2016] 383 ITR 236/287 CTR 83 (Bom.) where, followingthe Supreme Court decision in CIT v. Toshoku Ltd. [1980] 125 ITR 525/19 CTR 192 the Court held that commission earned by a non- resident (that is to say, foreign) agent who carried on the business of selling Indian goods outside India cannot be said to be deemed income accrued or arising in India. ”Unquote.

Thus, Hon’ble Jurisdictional High Court has clearly explained the law that commission earned by non resident agents who carried business outside India cannot be deemed to be income arising in India. The facts of the present case are identical hence the decision is applicable to the present case.

19.

Similarly Hon’ble Supreme Court in the case of PCIT vs Vedanta Ltd 448 ITR 732 (SC) have upheld the decision of ITAT where in the foreign entity receiving amounts were not Indian Residents and were not subject to tax and that the services were rendered outside India, no TDS was required.

20.

Ld.DR has not brought on record any contrary decision of Hon’ble Bombay High Court or Hon’ble Supreme Court.

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21.

Similar decision has been rendered by ITAT Delhi in the case of ACIT vs Manoj Raizada 154 taxmann.com 54 (Delhi) and ACIT vs Kapoor Industries Ltd 187 ITD 603 (Del Trib) .

22.

Accordingly, for all the reasons discussed above, respectfully following, Hon’ble Supreme Court, Hon’ble Jurisdictional High Court, ITA (supra), we uphold the Order of Ld.CIT(A).

23.

All the grounds raised by the Revenue are regarding disallowance u/s 40(a)(i), accordingly for the elaborate reasons discussed above, all the grounds raised by the revenue are dismissed.

24.

In the result, Revenue’s appeal is dismissed.

Order pronounced in the open Court on 20th May, 2026

Sd/- Sd/- (VINAY BHAMORE) (Dr. DIPAK P. RIPOTE) JUDICIAL MEMBER ACCOUNTANT MEMBER पुणे/Pune; दिन ांक/Dated : 20-05-2026 TNMM

आदेश की प्रतितिति अग्रेतिि/Copy of the Order is forwarded to: अपील र्थी / The Appellant 1. प्रत्यर्थी / The Respondent 2. 3. The concerned Pr.CIT, Pune 4. DR, ITAT, ‘C’ Bench, Pune 5. ग र्ड फ ईल / Guard file. आदेशानुसार/ BY ORDER, // True Copy // Assistant Registrar आयकर अपीलीय अदिकरण ,पुणे / ITAT, Pune

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