DEPUTY COMMISSIONER OF INCOME-TAX Vs. I.M. GEARS (P.) LTD.
LAWS(IT)-2014-7-9
INCOME TAX APPELLATE TRIBUNAL
Decided on July 31,2014

Deputy Commissioner Of Income -Tax Appellant
VERSUS
I.M. Gears (P.) Ltd. Respondents

JUDGEMENT

- (1.) BOTH these appeals are filed by the Revenue against the common order of the Commissioner of Income -tax (Appeals) -II, Chennai dated 18.09.2013 for the assessment years 2009 -10 and 2010 -11. The only issue in both these appeals of the Revenue is that Commissioner of Income -tax (Appeals) erred in deleting disallowance made by the Assessing Officer under section 40(a)(i) of the Act on account of non -deduction of TDS on the agency commission paid by the assessee to its non -resident agents. The Assessing Officer while completing assessments for both these assessment years disallowed agency commission payments made to non -resident agents as the assessee did not deduct TDS under section 195 of the Act. The Assessing Officer invoking provisions of section 40(a)(i) of the Act disallowed such payments made by the assessee to non -resident agents. The Assessing Officer was of the view that since the Board has withdrawn Circular No. 786 dated 7.2.2000 which deals with payment of export commission to nonresident agents, the payments made by the assessee towards sales commission to non -resident agents is liable for TDS under section 195 of the Act. On appeal, the Commissioner of Income -tax (Appeals) following the co -ordinate Bench decision of this Tribunal in the case of Asstt. CIT v. Farida Shoes (P.) Ltd. : [2013] 143 ITD 400 : 34 taxmann.com 268 (Chennai) and also the decision of Hon'ble Supreme Court in the case of GE India Technology Cen.(P) Ltd. v. CIT : [2010] 327 ITR 456/193 Taxman 234/7 taxmann.com 18 deleted the disallowance against which Revenue is in appeal before us. The assessee also filed cross objections in support of the order of the Commissioner of Income -tax (Appeals) in deleting the disallowance.
(2.) DEPARTMENTAL Representative vehemently supported the order of the Assessing Officer in disallowing sales commission paid to overseas agents for the failure to deduct TDS under section 195 of the Act.
(3.) COUNSEL for the assessee supports the order of the Commissioner of Income -tax (Appeals). Heard both sides. Perused orders of lower authorities and the decisions relied on. The Commissioner of Income -tax (Appeals) considered this issue in the light of the submissions of the assessee and also decisions rendered by the co -ordinate Bench of this Tribunal on similar circumstances allowed the appeals of the assessee deleting disallowances observing as under: - - '4.3 I have considered the assessee's submissions as well as the orders of the Hon'ble ITAT in the cases of M/s. Farida Shoes P Ltd. (ITA No. 159/Mds/2013 dated 11.04.2013 for A.Y. 2008 -09) and M/s. Delta Shoes P Ltd. (ITA No. 909/Mds/2013 dated 31.07.2013). The facts involved in the cases of M/s. Farida Shoes P Ltd. and M/s. Delta Shoes P. Ltd., are exactly similar to those involved in the present assessee. In, the said cases (i.e. Farida Shoes P. Ltd. and Delta Shoes P.Ltd) the payments made to the non -residents, without making TDS, were similar to those made by the present assessee company. The Assessing Officer disallowed the said payments u/s. 40(a)(i) for non -deduction of TDS u/s. 195 of the Act. The CIT(A) allowed the appeals of the said companies. The Revenue preferred an appeals to the ITAT against the orders of the CIT(A). The Hon'ble Income Tax Appellate Tribunal of Chennai, vide its orders mentioned above, has held that the services provided by the concerned non -residents neither amounts to managerial/technical services nor the payments are assessable to tax in India and hence the provisions of sec. 195 of the Act are not applicable to the facts of the said companies. The relevant portion of the order of the ITAT (in ITA No. 159/Mds/2013 dated 11.04.2013 for AY. 2008 -09 in the case of M/s. Farida Shoes P. Ltd.) is reproduced as under: "10. We have heard both sides, perused the materials available on record and case law cited. In this case, the assessee has made certain payments to overseas agents as commission and no TDS deducted. According to the Assessing Officer, the assessees' business is situated in India and the payments were also made from India and according to section 195, the assessee is under obligation to deduct TDS. Therefore, by invoking section 40(a)(i), he has disallowed an amount of Rs. 5,62,13,826/ -. On appeal, the CIT(Appeals) deleted the disallowance on the ground that the commission was paid to non -resident agent and it cannot be said to have been accrued in India and section 195 have no application. The only issue for our consideration is as to whether the assessee is under obligation to deduct the TDS under section 195 or not The CIT(Appeals), by considering the entire facts and circumstances of the case passed a detailed order by observing that section 195 have no application to assessee's case. In the case of M/s. Prakash Impex v. ACIT (supra), the Coordinate Bench of ITAT Chennai has considered the very same issue and observed that the commission paid to non -resident agent for the services rendered outside India and such payments are not chargeable to tax India and therefore, the provisions of section 195 are not applicable view of the decision of the Hon'ble Supreme Court in the case of G.E. India Technology Centre P. Ltd. v. CIT (supra). 11. In the case of CIT v. EON Technology P) Ltd., the Hon'ble Delhi High Court has also held that the commission payment to its British parent/holding company ETUK could not said to have been accrued to ETUK in India and therefore, the assessee was not liable to deduct tax at source from payment of commission to ETUK. The head note of odder is reproduced hereunder:. "Section 9 of the Income -tax Act, 1961 - Income - Deemed to accrue or arise in India - Assessment year 2007 -08 - Assessee -company was engaged in business of development and export of software - During relevant assessment year, it had paid commission to its British parent/holding company ETUK on sales and amounts realized on export contracts procured by ETUK for assessee - Assessing Officer held that commission income earned by ETUK had accrued in India or was deemed to accrue in India and, therefore, assessee was liable to deduct tax at source therefrom and as there was failure, said expenditure should be disallowed under section 40(a)(ia) - Whether when ETUK was not rendering any service or performing any activity in India itself commission income could be said to have accrued, arisen to or received by ETUK in India merely because it was recorded in books of assessee in India or was paid by assessee situated in India - Held, no - Whether for applying section 9 Assessing Officer was required to examine whether said commission income was accruing or arising directly or indirectly from any business connection in India - Held, yes - Whether since facts found by Assessing Officer did not make our a case of business connection as stipulated in section 9(J)(i), commission income could not be said to have accrued to ETUK in India and, therefore, assessee was not liable to deduct tax at source from payment of commission to ETUK - Held, yes (In favour of assessee)." 12. The Hon'ble Delhi High Court has considered the decision of the Hon'ble Supreme Court in the case of M/s. Transmission Corporation of Andhra Pradesh reported in : 239 ITR 587 and decided the issue in favour of the assessee. 13. In the case of Armayesh Global v ACIT (supra), the Mumbai Bench of ITAT has observed that the commission payment was made to the overseas agent for procuring export orders. The agents have not been provided any managerial/technical services. The relationship between the assessee and the non -resident (agent) was only for rendering non -technical services. Moreover, there was no permanent establishment of the said non -resident in India. Therefore, the commission paid to the non - resident agent did not accrue or arise in India and thus, there was no need for deducting TDS under section 195 of the Act. 14. In the present case, the assessee paid certain amounts too overseas agents for procurement of export orders. The agents have not provided any managerial/technical services. The payments received by the non -resident Indian are not taxable in India. Taking into consideration of entire facts and circumstances and by following aforesaid decisions, we are of the opinion that the issue involved in this appeal is covered in favour of the assessee and section 195 have no application to assessee's case. Accordingly, the appeal of the Revenue is dismissed." In the instant case also, the assessee company is engaged in the business of export of engineering goods (in the cases of Farida Shoes P. Ltd. and Delta Shoes P. Ltd. the products exported were shoes). As explained by the assessee, it is availing the services of certain non -resident agents for procuring export orders and for marketing the products for the assessee for which it is paying commission. Perusal of the assessee's submissions shows that the said non -resident agents have no business connection in India, nor they have any permanent establishments in India. They are procuring export orders for the assessee. Thus, the said non -resident agents are operating outside the country and all the services are rendered abroad only. In other words, though the said non -residents are rendering services to the assessee (Indian company), these services are rendered totally outside the country. In such a situation the payments (commissions) made to such agents are not liable to be taxed in India. TDS is required to be deducted on all payments to non -residents if the said payments are liable for tax in India. In the instant case, the commission payments to the non -resident agents are not taxable in India as the services are rendered abroad and the agents have no PE in India. Therefore, there is no requirement to deduct TDS on these payments. For this purpose' reliance is also placed on the decision of Apex Court in the case of GE India Technology Cen. P. Ltd v. CIT : [20T0] 327 ITR 456 (SC), wherein it was held as under: Section 195 of the Income -tax Act, 1961 - Deduction of tax at source - Payment to non -resident - Whether the moment a remittance is made to a non -resident, obligation to deduct tax at source does not arise; it arises only when such remittance is a sum chargeable under Act, "i.e., chargeable under sections 4, 5 and 9 - Held, yes. Whether section 195(2) is not a mere provision to provide information to ITO(TDS) so that department can keep track of remittances being made to non -residents outside India; rather it gets attracted to cases where payment made is a composite payment in which certain proportion of payment has an element of 'income' chargeable to tax in India and payer seeks a determination of appropriate proportion of sum chargeable - Held, yes. Further, under similar facts and circumstances, the Hon'ble ITAT of Chennai, in the cases of M/s. Farida Shoes P Ltd (in ITA No. 159/Mds/2013 dated 11.04.2013 for A.Y. 2008 -09) and ACIT v. Delta Shoes P. Ltd (in ITA No. 909/Mds/2013 dated 31.07.2013), has examined the issue of commission payments to non -residents for procuring export orders in detail and concluded that the commission payments to the said non -resident agents are not assessable to tax in India and consequently the resident payee company (M/s. Farida Shoes P Ltd v. Delta Shoes P Ltd) was not under the obligation of deduction TDS on the commission payments u/s. 195 of the Act. In the present appeals of the assessee (i.e. in the A.Ys. 2009 -10 and 2010 -11) also the facts and circumstances are exactly identical to those involved in the case of M/s. Farida Shoes P. Ltd. for A.Y.2008 -09 (except the type of product exported.) Therefore, since the issue involved in the present appeals is the same and the facts are exactly identical, the above decision of the ITAT, (M/s. Farida Shoes P Ltd., in ITA No. 159/Mds/2013 dated 11.04.2013), is equally applicable to the facts of the present appeals of the instant assessee for A.Ys. 2009 -10 and 2010 -11 under consideration. Therefore, respectfully following the decision of ITAT, in the case of M/s. Farida Shoes P. Ltd (in ITA No. 159/Mds/2013 dated 11.04.2013), I hold that the above transactions of commission payments to the non -residents for procuring the export orders, are not assessable to tax in India and consequently the assessee company is not under any obligation to deduct the TDS on the above commission payments u/s. 195 of the Act. Therefore, the provisions of sec. 40(a)(i) have no application in the present case. Accordingly, the additions made by the Assessing Officer in both of the assessment years under consideration, on account of disallowance of commission payments for non -deduction of TDS u/s. 40(a)(i) r.w.s. 195 of the Act, are not justified and deleted.' ;


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