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Income Tax Appellate Tribunal, A/“SMC” BENCH, CHENNAI
Before: SHRI CHANDRA POOJARI
आदेश / O R D E R
PER CHANDRA POOJARI, ACCOUNTANT MEMBER:
This appeal is filed by the assessee, aggrieved by the order of the Learned Commissioner of Income Tax (A)-5, Chennai dated 04.07.2017 pertaining to assessment year 2009-10.
The assessee raised the following grounds for consideration.
1. The Commissioner of Income-tax (Appeals) erred both in Law and on the Facts of the Case in disallowing the Commission paid by the appellant to the non-resident agent under Section 40(a)(i), amounting to `3,91,194/-.
2. He erred in upholding the disallowance u/s.40(a)(i) for commission paid to the non-resident agent, on the ground that the commissioner paid by the Appellant is income chargeable to tax in India and the tax should have been deducted by the Appellant u/s. 195 of the Act. 3. He failed to appreciate that the commission paid to the non-resident is for the services rendered outside India and that, it was not taxable in India and, therefore, tax need not be deducted at source. 4. The Appellant submits that the disallowance is unreasonable. 5. The Appellant, therefore, prays that the disallowance of `3,91,194/- made u/s.40(a)(i) may be deleted.
The brief facts of the case are that the assessee had filed its return of income declaring total income of `26,12,100/- on 26,02.2010. The case was selected for scrutiny assessment and order u/s.143(3) of the Act was passed on 19.12.2011 accepting the returned income. Further, the AO noticed that the assessee had debited a sum of Rs.10,57,763/- on account of commission payment.
Out of the said amount payments made to local agents are at `6,66,569/- and to foreign agent at `3,91,194/-. It is further observed that the assessee has deducted TDS out of local agency commission payments, however no tax was deducted at source at the time of making overseas commission payment of `3,91,194/-. 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 Rs.3,91,194/- to foreign agents which the assessee failed to do so thereby violating the provisions of section u/s.40A(a)(i) of the I.T. Act, 1961. According to ld. Assessing Officer, the income chargeable to tax to the extent of `3,91,194/- had escaped assessment within the meaning of section147 of the Income Tax Act, 1961, proceedings u/s.147 was initiated and notice u/s.148 was issued on 28.03.2014 which was duly served on the assessee on 29.03.2014. 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, we are 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.