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Income Tax Appellate Tribunal, C/“SMC” BENCH, CHENNAI
Before: SHRI CHANDRA POOJARI
आदेश / O R D E R
PER CHANDRA POOJARI, ACCOUNTANT MEMBER:
1. This appeal is filed by the assessee, aggrieved by the order of the Learned Commissioner of Income Tax(A)-5, Chennai dated 27.07.2017 pertaining to assessment year 2011-12.
The assessee raised the following grounds for adjudication.
For that the order of the Commissioner of Income Tax (Appeals) is contrary to law, facts and circumstances of the case and at any rate is opposed to the principles of equity, natural justice and fair play.
2. For that the Commissioner of Income Tax (Appeals) failed to appreciate that the order of the Assessing Officer is without jurisdiction. 3. For that the Commissioner of Income Tax (Appeals) erred in upholding the disallowance of commission paid to foreign agent amounting to Rs.8,77,013/- u/s.40(a)(i). 4. For that the Commissioner of Income Tax (Appeals) failed to appreciate that the provisions of section 40(a)(i) are not applicable in the facts and circumstances of the case. 5. For that the Commissioner of Income Tax (Appeals) failed to appreciate that the requirement to deduct tax at source uls.195 does not arise on commission paid to foreign agent for procuring business. 6. For that the Commissioner of Income Tax (Appeals) failed to appreciate that the foreign agent did not have any business connection in India. 7. For that the appellant has not been treated as an assessee in default u/s.201 (1) and hence no disallowance is warranted u/s.40(a)(i)
The brief facts of the case are that the assessee had filed its return of income declaring total income of `27,27,789/- on 01.10.2011. The case was selected for scrutiny assessment and order u/s.143(3) of the Act was passed on 31.10.2014 ,thereby determining the total income at `36,04,800/-. Further, the AO noticed that the assessee had debited a sum of `8,77,013/- as foreign agent commission without deducting tax at source in violation to the provisions of the section 195 r.w.s.40(a)(i) of the Act. In view of insertion of Explanation 4 to Sec.9(1)(i) with corresponding introduction-of Explanation 2 to Section 195(1), both by the Finance Act, 2012 with retrospective effect from 01.04.1962, the assessee was liable to deduct tax at source on commission payments of `8,77,013/- to foreign agents which the assessee failed to do so thereby violating the provisions of section u/s.40(a)(i) of the I.T. Act, 1961. Accordingly, the ld. Assessing Officer disallowed `8,77,013/- paid towards foreign agent commission, namely, M/s.G.&L Enterprise, Hon Kong rendering the service of procuring business for the assessee entirely abroad, on the ground that non-deduction of tax at source.
3.1 Aggrieved by the order of ld. Assessing Officer, the assessee carried the appeal before the Ld.CIT(A). On appeal, Ld.CIT(A) after going through the AO’s Remand Report and following the decision of Co-ordinate Bench of Chennai Tribunal in the case of ACIT Vs. Euro Leder Fashions Ltd in 64 Taxmann.com 253(Chennai), confirmed the order of ld. Assessing Officer. Against the order of Ld.CIT(A), now the assessee is in appeal before us.
Before us, the ld. AR, further submitted that the services rendered by the non-resident agent could at best be called as a service for completion of the export commitment and would not fall within the definition of "fees for technical services" and, therefore, section 9 was not applicable and, consequently, section 195 did not come into play. Therefore, the disallowance made by the Assessing Officer towards export commission paid by the assessee to the non- resident to be deleted.
4.1 Further, the ld.A.R submitted that the income has been accruing outside India for the services rendered for marketing assessee's products in abroad and recipient has no business connection in India, what is paid to the agent is not taxable in India, hence, there is no question of deduction of tax at source from that payment and no assessment of recipient has been made in India. Further, he submitted that only when the income of the agent is chargeable to tax under the provisions of the Act, then only the assessee is liable to deduct TDS as per sec. 195C of the I.T. Act. The person paying the commission to a non-resident is not liable to deduct tax if such services are not chargeable to tax under the Act. Sec. 195 contemplates not merely amounts, the whole of which are pure income payments; it also covers composite payments which have an element of income embedded or incorporated in them. The obligation to deduct tax at source, is however, limited to appropriate proportion of income chargeable under the Act forming part of the gross sum of money payable to the non-resident.
4.2 The Ld. AR further submitted that income though accrued in India, the services were rendered to the assessee abroad and the payments were also received by them abroad, therefore, no income would arise under the provisions of sec. 9(1) of the Act.
The Ld. DR submitted that the selling agent in this case though had rendered services abroad, was entitled to receive the commission for the services rendered to the assessee and received the amount through or from business connection which it had in India and source of income is in India. Being so, the income shall be deemed to accrue or arise in India. Since the source of income of the non-resident, who is the agent of the assessee, it earned commission from the business activity of the assessee and the assessee has not deducted TDS, it should be disallowed u/s. 40(a)(i) of the I.T. Act.
The services rendered by the agent falls within the ambit of Explanation (2) of sec. 5 of the I.T. Act. The fact that the agent has rendered services abroad in the form of soliciting orders and the commission is to be remitted to them abroad is wholly irrelevant for the purpose of determining the situs of their income. According to the ld. DR, non-deduction of TDS towards this income is to be disallowed.
I have heard both the parties and perused the material on record. At the outset, certain provisions of the Act needs to be looked into section 40(a)(i) which reads as under:
"40 Not withstanding (a) In the case of any assessee
(i) Any interest (not being interest on a loan issued for public subscription before the 1st day of April, 1938) royalty, fees for technical services or other sum chargeable under this Act, which is payable A. Outside India B. In India to a non-resident, not being a company or to a foreign company, On which tax is deductible at source under Chapter VIIB and such tax has not been deducted or, after deduction, has not been paid during the previous year, or in the subsequent year before the expiry of the time prescribed under sub-section (1) of section 200:"
The aforesaid clause makes it clear that the disallowance shall be made in case of any payment made which is chargeable under this Act and is payable outside India or in India to a non- resident not being a company or to a foreign company on which tax is deductible at source. Therefore, the first condition required to be fulfilled is the payment must be chargeable under the Act, thereafter the question of deduction of tax will arise. Section 195 (1) of the Act also prescribes that tax has to be deducted while making payment to non-resident which is chargeable under the provisions of the Act. Therefore, the condition precedent for deduction of tax is the income must be chargeable under the provisions of the Act.
As seen from the orders of the lower authorities, the assessee has not discharged the burden cast upon it to show the nature of services rendered by non-resident agent. If there are services rendered by non-residents, who have no permanent establishment in India or have any business connection in India, by virtue of which the payment of commission accrued or arose in India then, it is exempted, if the assessee is able to prove that the services were rendered by those non-residents at abroad. In the present case, the assessee has not established the facts on record that the non-resident has rendered services at abroad and there is no business connection in India by producing relevant records, viz., either agreement entered into by the assessee with them or correspondence took between the parties. Without examining these details, I am not in a position to decide the nature of services rendered by the non-resident agent. Therefore, it is appropriate to remit the entire issue back to the file of the AO with direction to the assessee to prove that it was sales commission towards procurement of orders from abroad.
Accordingly, the entire issue is remitted back to the file of the AO for fresh consideration and the AO is directed to make necessary enquiry regarding the nature of services rendered by the non- resident agent and the payments made thereof. With these observations, the appeal of assessee is allowed for statistical purposes.
In the result, the appeal of the assessee is allowed for statistical purposes
Order pronounced on 07.12.2017.