PRINCIPAL COMMISSIONER OF INCOME TAX 2 vs. M AND B ENGINEERING LTD.

Facts

The Revenue, Principal Commissioner of Income Tax, filed a tax appeal before the Gujarat High Court challenging an order of the Income Tax Appellate Tribunal (ITAT), Ahmedabad Bench. The ITAT's order, dated November 30, 2018, pertained to Assessment Year 2014-15 and concerned the deletion of an addition of Rs. 2,93,56,350. This addition was made by the Assessing Officer on account of the disallowance of commission payable to foreign agents, citing non-deduction of tax at source under Section 40(a)(ia) of the Income Tax Act, 1961. The Commissioner of Income Tax (Appeals) had previously deleted this addition, a decision upheld by the ITAT.

Held

The High Court held that the appeal filed by the Revenue did not involve any substantial question of law. The Court noted that the ITAT had relied on the High Court's own decision in the case of PR CIT Vs. MGM Exports (Tax Appeal No. 309 of 2018, dated 11/04/2018). The ratio of that decision, applied by the ITAT, was that a person paying interest or any other sum to a non-resident is not liable to deduct tax if such sum is not chargeable to tax under the Act. The ITAT had concluded that the commission income in the hands of the foreign agent was not chargeable to tax in India, and consequently, the question of deducting TDS under Section 195 did not arise. Therefore, the High Court found no error in the ITAT's order and dismissed the appeal.

Key Issues

1. Whether the Appellate Tribunal had erred in law and facts in upholding the order of the CIT(A) deleting the addition of Rs. 2,93,56,350 made under Section 40(a)(ia) of the Act for non-deduction of tax on commission payable to foreign agents. The Revenue contended that the disallowance under Section 40(a)(ia) was justified due to the assessee's failure to deduct tax at source on commission paid to foreign agents. The Revenue's argument implicitly relies on the obligation to deduct tax at source on payments made to non-residents, as stipulated by the Act. The judgment does not record specific arguments from the Revenue beyond the proposed question of law. The Assessee's position, as reflected in the ITAT's decision, is that the commission income in the hands of the foreign agent was not chargeable to tax in India. Therefore, the obligation to deduct TDS under Section 195 did not arise. The ITAT relied on the decision of this Court in PR CIT Vs. MGM Exports.