2011 (11) TMI 243 - AT - Income Tax

Tax Deductible at source - Payment to NR having no fixed place of business in India - In view of CBDT Circular No. 786 dated 7/2/2000 and Ind Telesoft (P.) Ltd. (2004 - TMI - 32088 - AUTHORITY FOR ADVANCE RULINGS) fee paid to non-resident for securing business outside India is not liable to tax deduction at source since such income is not chargeable to tax in India Whether a transaction is shame - held that - The existence or non-existence of written agreement would not be fatal to claim deduction on account of expenditure on account of commission. - the finding of the AO with regard to the agreement being a sham document cannot be sustained Disallowance under 40(a)(iii) - No relation of employee and employer - TDS on salary not attracted.

Issues Involved:
1. Whether the assessee has established that the commission was paid for services rendered by Mr. Suresh Bafna.
2. Whether the deduction claimed by the assessee can be allowed despite the failure to deduct tax at source on the payment made to Mr. Suresh Bafna.
3. Whether the payment in question is not chargeable to tax in India due to Article 15 of the Indo-US DTAA.
4. Whether the payment in question can be considered as salary within the meaning of section 40(a)(iii) of the Act.

Issue-wise Detailed Analysis:

1. Establishment of Commission Payment for Services Rendered:
The assessee, a partnership firm engaged in the manufacturing and export of readymade garments, claimed a deduction for a commission paid to Mr. Suresh Bafna, a non-resident, for coordinating and representing the firm in America, Canada, and Mexico. The assessee provided an agreement dated 1/4/2000 appointing Mr. Bafna as an agent. However, the AO found discrepancies, such as the repetition of an outdated clause and the lack of evidence supporting the commission amount. The AO questioned the genuineness of the agreement and the relationship between the assessee and Mr. Bafna. The CIT(A) accepted the assessee's claim, citing CBDT Circular No. 786 and the Indo-US DTAA, and found no grounds for disallowing the commission. The Tribunal remanded the issue to the AO to verify the nature of services rendered by Mr. Bafna, directing the assessee to provide necessary details.

2. Deduction of Tax at Source:
The AO disallowed the commission payment under section 40(a)(iii) of the Act, arguing that the assessee failed to deduct tax at source. The CIT(A) disagreed, referencing CBDT Circular No. 786, which states that commission paid to non-residents for services rendered outside India is not subject to tax deduction at source. The Tribunal upheld this view, noting that the services were rendered outside India and thus not chargeable to tax in India, making section 195 inapplicable.

3. Applicability of Article 15 of the Indo-US DTAA:
The CIT(A) found that Mr. Bafna, a resident of the USA with no fixed base in India, was covered under Article 15 of the Indo-US DTAA, which exempts such income from Indian taxation. The Tribunal agreed but noted that the definition of professional services in Article 15(2) requires clarification of Mr. Bafna's professional skills. The matter was remanded to the AO for further verification, although this issue was deemed academic since the commission was already considered non-taxable due to the absence of a fixed base in India.

4. Classification of Payment as Salary:
The AO argued that the commission payment should be treated as salary under section 40(a)(iii) of the Act, necessitating tax deduction at source. The CIT(A) and the Tribunal rejected this, stating that there was no employer-employee relationship between the assessee and Mr. Bafna. Thus, the disallowance under section 40(a)(iii) was not justified.

Conclusion:
The Tribunal set aside the CIT(A)'s order, remanding the case to the AO to verify the nature of services rendered by Mr. Bafna. If the services are established, no disallowance can be made as the payment is not chargeable to tax in India. The appeals were partly allowed for statistical purposes.

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