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Facts
M/s Orbit Resorts Pvt. Ltd. paid commission to foreign agents for soliciting customers abroad. The Assessing Officer disallowed this payment under Section 40(a)(i) of the Income Tax Act, contending it was 'fees for technical services' on which TDS was not deducted. The CIT(A) upheld the disallowance, ruling the income was taxable in India.
Held
The Tribunal held that the commission paid to foreign agents was income earned on foreign land for services rendered outside India. Since the foreign agents did not have any permanent establishment in India, their income was not taxable in India, and consequently, no TDS was required to be deducted on these payments. The findings of the CIT(A) were therefore not justified.
Key Issues
Whether commission paid to non-resident agents for soliciting customers abroad, where the commission accrues only upon customers availing services in India, is taxable in India, and if TDS is applicable on such payments under Section 40(a)(i) of the Income Tax Act.
Sections Cited
250(6), 40(a)(i), 143(3), 9, 5, 9(1)(i), 9(ii), 9(iii), 9(iv), 9(vi), 9(vii), 5(2)(b), 40(a)(ia)
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Income Tax Appellate Tribunal, CHANDIGARH BENCH “B”, CHANDIGARH
Before: SHRI. RAJPAL YADAV, VP & SHRI. KRINWANT SAHAY, AM
Order PER KRINWANT SAHAY, AM: These are two appeals filed by the Assessee against the separate orders of the Ld. CIT(A)-1, Chandigarh dt. 11/01/2019 and 03/04/2019 respectively.
Since the facts involved in both the above appeals are common and appeals were heard together therefore they are being disposed off by this consolidated order for the sake of convenience.
2 3. Firstly we shall take appeal of the Assessee in for the A.Y. 2013-14 as a lead case for discussion.
In the present appeal Assessee has raised the following grounds:
1. That the order passed under section 250(6) by the Ld. Commissioner of Income Tax (Appeals)-I, Chandigarh in Appeal No. 12/16-17 dt. 11/01/2019 is contrary to law and facts of the case.
2. That in the facts and circumstances of the case, the Ld. Commissioner of Income Tax (Appeals) gravelly erred in upholding the disallowance Rs. 80,93,988/- made by the Ld. Assessing Officer by disallowing the commission paid abroad by invoking the provisions of Section 40(a)(i) of the Income Tax Act, 1961.
3. That the appellant craves to add, amend or alter any ground of appeal before or at the time of hearing of appeal, with the permission of the Hon’ble Income Tax Appellate Tribunal.
Briefly the facts of the case are that M/s Orbit Resorts Pvt. Ltd., based in Chandigarh, filed its return declaring losses of Rs.3,29,41,29,614/- for AY 2012–13. The company was engaged in the hospitality business, operating luxury hotels such as The Oberoi and Trident, Gurgaon. Thereafter the case of the assessee was selected for scrutiny under section 143(3) of the Income Tax Act, 1961.
5.1 The Learned Assessing Officer has discussed the addition at pages 27 of the assessment order wherein the Learned Assessing Officer has started his observation at page 26, para 4.6, wherein it has been mentioned that the assessee has produced only two agreements out of the many foreign entities mentioned above.
3 However, these two agreements show that it is not a commission for merely referring the customer living abroad. As per the agreement with the Trust International, It is the responsibility of the assessee company to take all measures to support and obtain any necessary equipment and authorization to enable Trust to perform the services on behalf of the client. The Ld. AO goes on to say that "It is therefore clear from the contract that the payment which is being made in the name of the commission, expenses actually fees for technical services. All the services provided by the foreign entities are based upon their expertise and the customer data. The assessee has utilized these services for business propagation and increasing profitability." 5.2 He further goes on to observe that since these services were found to be in the nature of FTS, the assessor was asked to explain whether any TDS has not been deducted on it. 5.3 In response, the assessee stated that no TDS has been deducted on the payments made to these non-resident companies. Further, the appellant during the course of assessment has given its detailed reply which is reproduced by the learned assessing officer in para 4.13 of the assessment order. The core aspects that the assessee has argued before the Learned Assessing Officer are that there is no service provided by the commission agent in India, the orders are booked outside, there is no presence of the commission agent in India and they have no permanent establishment in India and that TDS would have been deductible only if Income was chargeable to tax in India. Thereafter, the learned assessing officer has controverted the 4 findings of the assessee. The AO has discussed his finding and while concluding relied on the judgement of SKF Boilers and Dryers Pvt, which is referred to at page number 37 to 39 of the Learned Assessing Officers Order.
Against the order of the AO the assessee went in appeal before the Ld CIT(A). The Ld. CIT(A) held as under: "13.5 The second limb has to be read with section 9 of the Act. Any income to a non-resident would deem to accrue or arise in India if it fulfills conditions laid out in section 9 of the Act:- 9 (l)(i) - specified that if the income has a business connection in India or through an asset or proprietary or transfer of capital asset in India. The appellant has contended that there was no business connection, etc. in India. It is apparent that sections 9(ii), (iii), (iv), (vi) are not applicable in appellant's case as none of the payments were in nature of salary, dividend, interest or royalty. Section 9(vii) defines income by way of fees for technical service. The nature of services as stated by the appellant was in the nature of commission for facilitating sale. These wouldn't fall in the ambit of technical services defined in the sub-section. However, Sections 5 & 9 of the Act proceed on the assumption that income, profits and gains have a situs, though there is no indication as to how the situs has to be determined, and hence the situs has to be determined according to the general principles of law and in the light of the particular facts of each case. The words "accrue or arise" in section 5 have more or less a synonymous sense and income or profits are said to accrue or arise where the right to receive them comes into existence. From the facts and circumstances of the case, it is clear that that commission becomes payable to the Agents only after the foreign customers who avail the hotel room facilities of the assessee in India that too after full and final payment due to and paid to the applicant in India. This is the crux of the matter at hand. The certificates from above agents submitted by the AR do not shed any light on this arrangement. AO has given a detailed chart at Para 4.2 of the assessment order. On perusal of these charts, it is apparent that all the commission is related to room commission. That room commission arises only when the customers arranged by the help of agents visits India and avail the Hotel facilities. It is, therefore, clear that source of income for the Agent is participation by the customers/tourists in availing Hotel room and other facilities in India and the Agent will not be entitled to receive any commission for services rendered in case the customers/tourists do not avail the Hotel Room facilities de to 5 unforeseen circumstances which is normal practice in the Hotel industry. No doubt the Agent renders services abroad and pursues and solicits customers there in the territory allotted to him, but the right to receive the commission arises in India only when the customers avail the Hotel Room and other facilities in India at appellant's Hotels at Gurgaon, and make full and final payment to the applicant in India. The commission income would, therefore, be taxable under the Act in view of the specific provisions of section 5(2)(b) read with section 9(l)(i) of the Act. The facts that Agent renders services abroad in the form of pursuing and soliciting the customers and that the commission is remitted to him abroad are wholly irrelevant for the purpose of determining the situs of his income. It is in these facts and circumstances of the present case that the case law of SKF Boilers and Driers Pvt Ltd is applicable in the case of the appellant. In this case the AAR has relied on the case of Rajiv Malhotra (284 ITR 564) to make exports agents liable in Pakistan for order executed in India. In the case of Rajiv Malhotra the services were rendered in India and the payments of agents were linked to services being rendered in India. Facts are identical in the instant case. Therefore, the case is covered by the cases quoted by the Assessing Officer. It is also a fact that appellant has failed to submit any documents either before the AO or during appellate proceedings that he is eligible to get benefit under DTAA. In view of this discussion, addition made u/s 40(a)(ia) of the Act is therefore, confirmed."
6.1 From the findings of the Learned CIT Appeal, it is clear that the learned CIT appeal has held that the services provided by the applicant were not in the nature of fees for technical services. He has concluded that the nature of services as stated by the applicant was in the nature of commission for facilitating sale.
6.2 Further, the Ld CIT(A) observes that, no doubt the agent renders services abroad and pursues and solicits customers there in the territory allotted to him, but the right to commission arises in India only when the customers avail the hotel room and their facilities in India at assessee’s Hotel at Gurgaon. The commission
6 income would therefore be taxable under the Act in view of specific provisions of Section 5 read with Section 9, of the Act. He further relies on the judgment of SKF Boilers and Dryers Private Limited and has upheld the addition made by the Internet Assessing Officer.
Against the order of the Ld. CIT(A) the assessee preferred an appeal before the Tribunal.
During the course of hearing Ld. AR argued that income of the non-resident commission agent is not chargeable to tax in India, as those services do not classify as fees for technical services. This is a categorical finding of the learned CIT appeal and has not been controverted by the department. Further, no appeal has been preferred by the department against the said finding.
8.1 Ld. AR further submitted that the judgment that has been relied upon of SKF Boilers has been distinguished by various benches wherein they have held that it is advanced authority ruling judgment, which is not necessarily binding, but carries only a persuasive value. In the subsequent judgments to this judgment of AAR the facts and legal position has been distinguished and has been held that foreign commission paid to non-residents is not taxable in India and therefore no TDS was liable to be deducted. Ld. AR relied on the following judgments:
A B Hotel Ltd (Rad Hotel) vs DCIT, 25 SOT 368 - ITAT (Delhi); DCIT Delhi vs Taj International (P) Ltd, [(2018) 96 taxmann.com 222 (Delhi-Trib)];
7 DCIT vs Stylam Industries [(2024) 209 ITD 75 (Chd. Trib)]; ITC vs ACIT [(2024) 162 taxmann.com 734 - ITAT (Kolkata -Trib)].
8.2 The Ld. AR reiterated that the services rendered are in the nature of commission income earned for soliciting customers outside India. He submitted that the assessee becomes entitled to such commission only when the customer stays with the assessee, and that the commission is calculated on the total amount charged from the customer. This amount also includes any ancillary or allied activities such as excursions arranged by the hotel and/or food consumed by the guest. In light of the above submissions, the Ld. AR prayed that the addition made by the Ld. AO be kindly deleted.
Per contra, the Ld. DR relied on the orders of the lower authorities.
We have heard the rival contention and perused the material available on the record. We are of this considered view that commission paid by Orbit Resorts to the foreign agents were income of the foreign agents on a foreign land and not in India for services rendered outside India. We also find that such foreign commission agents do not have any permanent establishments in India, therefore, there income is not taxable in India. Once it is confirmed income that income any of such foreign commission agents are not taxable in India, then there is no question of deducting TDS on any payment made to such foreign commission agents for services rendered outside India. Accordingly, findings given by the Ld. CIT(A) on this issue cannot be justified. We have also gone through the various case laws brought on record by the 8 Counsel of the Assessee and we are of this considered view that TDS is not applicable on commission payment to foreign commission agents who have rendered services outside India and whose income is not taxable in India. Accordingly, Assessee’s appeal on this issue is allowed.
In the result, appeals of the Assessee stands allowed.
Order pronounced in the open Court on 16.10.2025.