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TMI Blog2011 (11) TMI 243X X X X Extracts X X X X X X X X Extracts X X X X ..... he claim of the assessee for deduction of payment of commission made to one Mr. Suresh Bafna. 2. We shall first take up for consideration the assessment year 2001-02. The assessee is a partnership firm. It is engaged in the business of manufacturing and export of readymade garments. While computing its income from export of readymade garments the assessee had claimed as a deduction a sum of Rs. 1,64,50,000/- paid to one Mr. Suresh Bafna, who is a non-resident. It was the claim of the assessee that Mr. Suresh Bafna coordinated and represented the assessee firm in connection with procurement of garment by foreign buyers in America, Canada & Mexico. It was the further the claim of the assessee that it had obtained the permission of the RBI for appointment of Mr. Suresh Bafna for the purpose of representing the assessee as coordinator with foreign buyers. The assessee also submitted before the AO that the payments made by the assessee to Mr. Suresh Bafna are not chargeable to tax under the Income Tax Act, 1961 (the Act) because the services were rendered by Mr. Suresh Bafna in America and that no business activity whatsoever was carried out in India. The assessee also relied on Articl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt for the above services will be as follows: MI will pay SB US$ 350,000.00 per annum for the above services provided SB will pay for the offices, employees salaries, travel, communications, promotional materials etc. in the United States. Based on the sales activities, this, remuneration may adjusted as necessary. This agreement will remain in effect for a period of two years and may be renewed thereafter subject to consent of both parties." 4. According to the AO in para 4 of the above agreement makes a reference to the agreement being on an experimental basis for six months from April to September 1998. This was a clause which was originally contained in the Agreement dated 1/9/1997 between the assessee and Mr. Suresh Bafna whereby Mr. Suresh Bafna was first appointed in writing as Agent of Assessee for marketing products abroad, and this clause has been mechanically repeated without realizing the fact that this clause will not be relevant for the agreement dated 1/4/2000. Further the AO found that there was no basis for fixing commission of US $ 3,50,000 to Mr. Suresh Bafna for sales target to be achieved by him. The AO therefore, called upon the assessee to furnish the fol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee not having done so had assumed substantial risk. According to the AO this circumstance also showed that the relationship between the assessee and Mr. Suresh Bafna was beyond business relationship. In this regard the AO also pointed out that the partners of the assessee had made gifts to certain persons. Though it was asserted by the assessee that the donees were not related to Mr. Suresh Bafna, the AO was of the view that the activities of the assessee did not appear to be bonafide. In the Agreement dated 01/04/2000 in the penultimate para it was agreed that the payment of remuneration of US$ 3,50,000/- to Shri Suresh Bafna was subject to the condition that SB will pay for the offices, employee salaries, travel, communications, promotional material etc. in the United States. Hence the AO called upon the assessee vide letter dated 04/03/2004 details of expenses incurred by SB so as to decide the reasonableness of Commission of US$ 3,50,000/- payable to him. However assessee did not furnish the said information stating that their agreement was not based on reimbursement of expenses. According to the AO, this stand of the Assessee cannot be accepted in view of the fact that as pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng taxable in India under Article 15 of the India-US Tax Treaty. (ii) Section 195 casts an obligation on the person paying the amount to deduct taxes. However, the taxes can only be deducted if there is any sum chargeable under the provisions of the I.T. Act. The appellant concluded that the fees received by Mr. Suresh Bafna is neither taxable nor is it taxable under the Act nor under the India-US Tax Treaty. For coming to the conclusion that the payment in question is not taxable under the Act in the hands of Suresh Bafna, the CIT(A) referred to CBDT circular No. 786 dated 7/2/2000 wherein it has been opined that no tax is deductible u/s. 195 in respect of expenditure on export commission and other related charges payable to a nonresident for services rendered outside India. The CIT(A) also relied on the decision in Ind Telesoft P. Ltd., In re [2004] 267 ITR 725 (AAR), wherein the AAR ruled that in respect of retainer fee paid to a non-resident company for securing business outside India, there is no liability to deduct tax, since such income is not chargeable to tax in India, so as to attract section 195 of the Act. Considering the fact that there was an agreement between the As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee submitted that similar expenditure in the past was allowed and it was only in the relevant assessment year that the AO has doubted the nature of expenses. It was his submission that it was for the parties to an agreement to decide the commission to be paid and the AO cannot sit in judgment over the wisdom of businessman. It was his submission that there was no other relationship between the assessee and Mr. Suresh Bafna except that of acting as commission agent. Further it was submitted by him that the evidence with regard to the nature of services rendered have already been furnished before the AO in A.Y 2004-05. It was his submission that the necessary documents for all the assessment years in these appeals can be filed before the AO for verification, if the Tribunal thinks it appropriate. 11. In his rejoinder the ld. D.R submitted that the assessee should not be given a chance to go back to the AO to prove the nature of services rendered. 12. We have considered the rival submissions. The following issues arise for our consideration. (i) Whether the assessee has established that the commission was paid for services rendered by Mr. Suresh Bafna. (ii) If answer to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decide the issue in accordance with law. This issue is decided accordingly. 14. As far as the question whether the agreement is sham or nominal we are of the view that if the services rendered are established then the assessee would be entitled to claim deduction on account of commission paid. The existence or non-existence of written agreement would not be fatal to claim deduction on account of expenditure on account of commission. We, therefore, hold that the finding of the AO with regard to the agreement being a sham document cannot be sustained and in any event, they are irrelevant. 15. As far as the question whether the payment in question is liable to deduct tax at source, admittedly the services were rendered by Mr. Suresh Bafna in America i.e. outside India. In view of CBDT Circular No. 786 dated 7/2/2000 export commission paid to non-resident for services rendered outside India are not chargeable to tax in India. The decision of the AAR, New Delhi in the case of Ind Telesoft (P.) Ltd., In re [2004] 267 ITR 725 laying down that 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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