2018 (11) TMI 1051 - AT - Income Tax

TDS u/s 195 - non deduction of tds on commission paid - Held that - The sum paid to the foreign agents for commission is not chargeable to tax in their hands in India and accordingly said expenditure is not liable to deduction of tax at source. Hence in our opinion order of the Ld. CIT(A) on the issue in dispute is well reasoned and we do not find any error in the same . The disallowance made under section 40(a)(i) is thus accordingly directed to be deleted. The grounds raised by the Revenue are accordingly dismissed.

Summary

Issues Involved:
1. Deleting the disallowance under Section 40(a)(ia) read with Section 195 of the Income Tax Act on account of non-deduction of TDS on payment of foreign commission.
2. Deleting disallowance based on the non-resident status of commission agents.
3. Ignoring the Board's circular No. 7/2009 and the order of AAR in the case of SKF Boilers and Driers Pvt. Ltd.
4. Ignoring Explanation 2 of Section 195 of the Income Tax Act.

Detailed Analysis:

Issue 1: Deleting the disallowance under Section 40(a)(ia) read with Section 195 of the Income Tax Act on account of non-deduction of TDS on payment of foreign commission.
The Assessing Officer (AO) had disallowed the commission paid to foreign agents under Section 40(a)(i) for non-deduction of tax at source. The AO relied on the decision of the Authority for Advance Ruling (AAR) in the case of SKF Boilers and Drives Private Limited and the withdrawal of CBDT Circulars No. 786 and No. 23 by Circular No. 7/2009. The Ld. CIT(A) deleted the addition, stating that the commission payments to non-resident agents were not chargeable to tax in India as the services were rendered outside India and the agents did not have a permanent establishment in India.

Issue 2: Deleting disallowance based on the non-resident status of commission agents.
The Ld. CIT(A) found that the foreign agents were not residents of India and did not have any permanent establishment in India. Thus, the commission paid to them was not chargeable to tax in India. The Tribunal upheld this view, stating that the commission payments did not represent income chargeable to tax under Section 195 of the Income Tax Act, and hence, no TDS was required to be deducted.

Issue 3: Ignoring the Board's circular No. 7/2009 and the order of AAR in the case of SKF Boilers and Driers Pvt. Ltd.
The AO argued that the withdrawal of CBDT Circulars No. 786 and No. 23 by Circular No. 7/2009 made the payments liable for TDS. However, the Tribunal noted that the withdrawal of these circulars did not change the legal position regarding the taxability of commission payments to non-resident agents. The Tribunal referred to the decision of the Bangalore Bench in the case of Exotic Fruits Pvt. Ltd., which held that even after the withdrawal of the circulars, commission paid to foreign agents did not become income chargeable to tax in India if the services were rendered outside India.

Issue 4: Ignoring Explanation 2 of Section 195 of the Income Tax Act.
The AO contended that Explanation 2 to Section 195 required the assessee to deduct TDS on payments to non-residents. However, the Tribunal found that the foreign agents' commission did not fall under the category of income chargeable to tax in India as per Section 195, since the services were rendered outside India and the agents did not have a business connection or permanent establishment in India.

Conclusion:
The Tribunal dismissed the Revenue's appeals for both assessment years 2006-07 and 2011-12, upholding the Ld. CIT(A)'s decision to delete the disallowance of commission payments to foreign agents. The Tribunal found that the commission payments were not chargeable to tax in India, and hence, no TDS was required to be deducted. The Tribunal also noted that the withdrawal of CBDT Circulars did not change the legal position regarding the taxability of such payments.