2024 (5) TMI 1493 - AT - Income Tax

TDS u/s 195 - addition u/s 40(a)(ia) - failure to deduct tax at source on the payment of sale commission to non-resident - HELD THAT - We find that assessee has paid sales commission expenses to non-resident who does not have any business connection in India and does not file return of income in India. The expenses were paid in connection with export of the goods and services. Assessee contended that the Income Tax Department has accepted the nature of the assessee s expenditure incurred by him which do not require deduction of TDS hence addition made by the Assessing Officer may be deleted. We find merit in the submissions of ld. Counsel for the assessee and noted that the nonresident to whom the payment was made does not have any permanent establishment in India or business connection in India. The similar payments were made by the assessee in the subsequent assessment years that is assessment year 2013-14 and assessment year 2018-19 and the Department has accepted the same therefore based on this factual position we delete the addition made by the AO. Disallowance u/s 40(a)(ia) - failure to deduct tax at source on the payment of sale promotion expenses to non-resident as per provision of section 195 - HELD THAT - We note that assessee has taken part in business fare held in USA and paid to non-resident for providing services in the form of stall on rent and other allied expenses of business at USA and these services were provided to the assessee outside India by a non-resident who does not have a business connection in India. We note that in the case of DML Exim Private Ltd 2020 (8) TMI 13 - ITAT RAJKOT held that where commission was paid by assessee to foreign parties for rendering services abroad for soliciting customers for its export business activities assessee was not liable for short direction of tax at source and therefore disallowance u/s 40(a)(ia) was not permissible.

Summary

Issues Involved:
1. Disallowance under Section 40(a)(ia) for failure to deduct tax at source on payment of sales commission to non-residents.
2. Disallowance under Section 40(a)(ia) for failure to deduct tax at source on payment of sales promotion expenses to non-residents.

Issue-wise Detailed Analysis:

1. Disallowance of Sales Commission Payments:
The primary issue in the appeals was the disallowance of Rs. 20,63,547/- under Section 40(a)(ia) of the Income Tax Act due to the alleged failure to deduct tax at source on sales commission payments to non-resident agents. The Assessing Officer (AO) noted that the payments were made to foreign entities without tax deduction as required under Section 195 of the Act. The AO rejected the assessee's contention that the income did not accrue or arise in India, as the agents had no business connection in India. The AO emphasized that Explanation 2 to Section 195, inserted with retrospective effect, mandated tax deduction regardless of the non-resident's connection to India. The CIT(A) upheld the AO's decision, asserting that the income was deemed to accrue in India under Sections 5(2)(b) and 9(1)(i). However, the Tribunal accepted the assessee's argument that similar payments were allowed in previous years without TDS, and the non-resident agents had no permanent establishment in India. Consequently, the Tribunal deleted the disallowance, allowing the appeal on this ground.

2. Disallowance of Sales Promotion Expenses:
The second issue concerned the disallowance of Rs. 2,15,785/- under Section 40(a)(ia) for not deducting tax at source on sales promotion expenses paid to non-residents. The AO disallowed these expenses, citing the same reasons as for the commission payments. The CIT(A) confirmed this disallowance, referencing the provisions of Section 195 and the deemed accrual of income in India. The assessee argued that the payments were for services provided outside India, with no business connection in India, and thus not subject to TDS. The Tribunal noted that similar payments in other years were accepted without TDS and referenced the ITAT Rajkot decision in DML Exim Private Ltd and the Gujarat High Court ruling in MGM Exports, which supported the assessee's position. The Tribunal found merit in the assessee's arguments and deleted the disallowance, allowing the appeal on this ground as well.

Conclusion:
The Tribunal allowed both appeals, concluding that the disallowances under Section 40(a)(ia) for non-deduction of TDS on payments to non-residents were unjustified. The Tribunal emphasized the lack of a business connection in India for the non-residents and the acceptance of similar payments in other assessment years without TDS.