ACIT 25(2), MUMBAI vs. S & S EXPORTS, MUMBAI

We have heard the ld. Departmental Representative (DR) for the Revenue and ld. Authorized Representative (AR) for the assessee and perused the material available on record.

Ground No. 1 & 2 raised by Revenue relates to deletion of addition of Rs. 64,57,316/- on account of disallowance of export commission. The ld. DR for the Revenue supported the order of AO and would argue that the assessee has paid the export commission to two parties which are based in Germany & Malta without making any deduction at source. As the assessee failed to make the TDS on payment of commission to the parties based in Germany & Malta. Thus, the AO correctly disallowed the commission payment. On the other hand, the ld. AR of the assessee argued that the foreign agent to whom the commission payment did not have any business connection in any business place in India. Thus, the assessee was not liable to make TDS on the commission payment which was made abroad. It was further argued that as per TTAA with Germany & France, the payment for services to be considered as business income of payee which is to be taxed in the country as their evidence in absence of any PE in the country of payment. The ld. AR of the assessee further relied upon the decision of Hon’ble Madras High Court in CIT vs. Ms. Farida Leather Company in of 2015 dated 20.01.2016.

We have heard the rival contention of the parties and gone through the order of authorities below. The AO while making the assessment asked the assessee to explain whether tax has been deducted at source on the payment of export commission. The assessee filed is reply dated 20.02.2013 contending that the assessee has paid commission to the agent based in Germany & France, both of the country has DTAA in India. And as per term of DTAA payment for these services are to be treated as business income of payee which is to be taxed in the country of their residence in absence of any PE in the country of payment. It was further contended that all overseas agent provided their services in their country of business and help in procuring order, getting the sample approved from the overseas customer, acquiring goods at destination and timely realization of the payments. None of the activities were carried out in India nor any agents have any PE in India. The reply of assessee was not accepted by AO holding that assessee was liable to deduct TDS on payment of commission to the parties based in Germany & Malta and disallowed an amount of Rs. 64,57,360/- u/s 195 r.w.s. 40A(i) of the Act. The ld. CIT(A) while considering the appeal examined whether the commission paid to non-resident agents for the services provided in foreign country is taxable in India or not. The ld. CIT(A) observed that the foreign agent did not have no business connection or they have business place in India. All business of operators are outside in India. The ld. CIT(A) concluded that the explanation to section 9(2) inserted by Finance Act with retrospective effect from 01.01.1976 is not applicable to section 9(1)(ii) of the Act and deleted the disallowance. The Hon’ble Madras High Court in recent decision in CIT vs. Farida Leather Company (supra) while considering the similar ground held as under: 8. The question now is, whether the assessee ought to have deducted tax at source as contemplated under Section 195 of the Act, when the assessee paid commission to foreign agent.

This question has been answered by the Hon'ble Supreme Court, in the case of G.E. India Technology Centre Pvt. Ltd. v. CIT (2010) 327 I.T.R. 456, in which, it is very categorically held that the tax deducted at source obligations under Section 195(1) of the Act arises, only if the payment is chargeable to tax in the hands of the non-resident recipient. 9.1. Therefore, merely because a person has not deducted tax at source or a remittance abroad, it cannot be inferred that the person making the remittance, namely, the assessee, in the instant case, has committed a default in discharging his tax withholding obligations because such obligations come into existence only when the recipient has a tax liability in India. 9.2. The underlying principle is that, the tax withholding liability of the payer is inherently a vicarious liability on behalf of the recipient and therefore, when the recipient / foreign agent does not have the primary liability to be taxed in respect of income embedded in the receipt, the vicarious liability of the payer to deduct tax does not arise. This vicarious tax withholding liability cannot be invoked, unless primary tax liability of the recipent / foreign agent is established. In this case, the primary tax liability of the foreign agent is not established. Therefore, the vicarious liability on the part of the assessee to deduct the tax at source does not exist.

Further, just because, the payer / assessee has not obtained a specified declaration from the Revenue Authorities to the effect that the recipient is not liable to be taxed in India, in respect of the income embedded in the particular payment, the Assessing Officer cannot proceed on the basis at the payer has an obligation to deduct tax at source. He still has to demonstrate and establish that the payee has a tax liability in respect of the income embedded in the impugned payment.

In the instant case, it is seen, admittedly that the non- resident agents were only procuring orders abroad and following up payments with buyers. No other services are rendered other than the above. Sourcing orders abroad, for which payments have been made directly to the non-residents abroad, does not involve any technical knowledge or assistance in technical operations or other support in respect of any other technical matters. It also does not require any contribution of technical knowledge, experience, expertise, skill or technical know-how of the processes involved or consist in the development and transfer of a technical plan or design.

As the non-residents were not providing any technical services to the assessee, as held above and as held by the Commissioner of Income Tax (Appeals), the commission payment made to them does not fall into the category of "fees of technical services" and therefore, explanation (2) to Section 9 (1) (vii) of the Act, as invoked by the Assessing Officer, has no application to the facts of the assessee's case.”

Thus, considering the facts of the case in hand and the latest decision of Hon’ble Madras High Court in CIT vs. Farida Leather Company (supra), we do not find any reasoning to interfere with the finding of the ld. CIT(A).

In the result, both the grounds raised