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2016 (2) TMI 798 - MADRAS HIGH COURT

2016 (2) TMI 798 - MADRAS HIGH COURT - TMI - Disallowance u/s 40(a)(i) - whether the assessee ought to have deducted tax at source as contemplated under Section 195 of the Act, when the assessee paid commission to foreign agent? - Held that:- In the instant case, it is seen, admittedly that the nonresident agents were only procuring orders abroad and following up payments with buyers. No other services are rendered other than the above. Sourcing orders abroad, for which payments have been made d .....

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land or a house / real estate agent / broker, who will be involved in merely identifying the right property for the prospective buyer / seller and once he completes the deal, he gets the commission. Thus, by no stretch of imagination, it cannot be said that the transaction partakes the character of “fees for technical services” as explained in the context of Section 9 (1) (vii) of the Act.

As the non-residents were not providing any technical services to the assessee, as held above a .....

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lso made abroad.. When the transaction does not atract the provisions of Section 9 of the Act, then there is no question of applying Explanation 4 to Section 9 of the Act. Therefore, the Revenue has no case and the Tax Case Appeal is liable to be dismissed. - Decided in favour of assessee - Tax Case Appeal No.484 of 2015 - Dated:- 20-1-2016 - MR.M.JAICHANDREN AND MRS. S.VIMALA, JJ. For The Appellant : Mr. J.Narayanasamy For The Respondent : Mr. T.N.Seetharaman JUDGMENT This Tax Case Appeal has b .....

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was made and during completion of assessment, the Assessing Officer disallowed a deduction of ₹ 52,17,014/-, being the commission paid to foreign agents, under Section 40 (a) (i) of the Income Tax Act, 1961 (hereinafter referred to as the Act ). 2.1. Aggrieved over the order passed by the Assessing Officer, the assessee filed an appeal before the Commissioner of Income Tax (Appeals) (CIT (A)). 2.2. The CIT (A) allowed the appeal by the assessee and deleted disallowance made by the Assessi .....

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ted as income deemed to accrue in India and Section 195 of the Act has no application in such cases. The further findings are that: (a) the non-grant of 'nil deduction certificate' would not entitle the Assessing Officer to proceed for 'non-deduction of tax at source', while making payments; (b) the Assessing Officer had to establish that the payee had tax liability in respect of the income embedded in the impugned payment; (c) the non-resident agents were only procuring orders f .....

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ribunal allowed the assessee's appeal, following the earlier orders of the Tribunal. The Tribunal held that no disallowance of expenditure of commission paid by the assessee can be made on the ground of non-deduction of tax at source, while making payments by invoking provisions of Section 40 (a) (i) of the Act. 2.4. Aggrieved over the order of the Income Tax Appellate Tribunal, the Revenue has preferred this Appeal, raising the following substantial questions of law:- 1. Whether on the fact .....

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insertion of Explanation 4 to Section 9 (1) (i) and Explanation 2 to Section 195 (1) of the Act, which was introduced by Finance Act, 2012, w.e.f. 01.04.1962 to overcome the said judgment? 3. Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that the income of the payee, the foreign agent, is not taxable in India inspite of insertion of Explanation below Section 9 (2) of the Act, which was introduced by Finance Act, 2010, w.e.f. 01.06.1976? 4. Whether .....

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see was paying commission for them. It is equally not disputed that even though they are rendering services to the assessee (Indian company), these services are rendered totally outside the country. 4. Under such circumstances, whether the commission payment made to such agents are liable to be taxed in India, is the main issue to be decided in this appeal. 5. The main contention of the learned counsel for the assessee / respondent is that the agency commission / sales commission paid by the ass .....

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lishment in India, they are liable to be taxed in India. 5.1. Yet another contention of the learned counsel for the assessee is that: (a) the assessee paid the amount by way of commission to foreign agents for the services rendered outside India; (b) the Tax Deduction at Source (TDS) is required to be made on all payments to non-residents, only if such payments are liable to be taxed in India. (c) following the decision of this Court, reported in The Commissioner of Income Tax v. Faizan Shoes Pr .....

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of the Act:- (i) Section 40 (a) (i) of the Act :- Section 40 - Amounts not deductible: Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head Profits and gains of business or profession , - (a) in the case of any assessee - (i) any interest (not being interest on a loan issued for public subscription before the 1st day of April, 1938), royalty, fees for technical services or other sum chargeable .....

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date specified in sub-section (1) of section 139, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid. Explanation: For the purposes of this sub-clause,- (A) royalty shall have the same meaning as in Explanation 2 to clause (vi) of sub-section (1) of section 9: (B) fees for technical services shall have the same meaning as in Explanation 2 to clause (vii) of sub-section (1) of section 9: (ia) thirty per cent of any sum payable to .....

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he income of the previous year in which such tax has been paid. Provided further that where an assessee fails to deduct the whole or any part of the tax in accordance with the provisions of Chapter XVII-B on any such sum but is not deemed to be an assessee in default under the first proviso to sub-section (1) of section 201, then, for the purpose of this sub-clause, it shall be deemed that the assessee has deducted and paid the tax on such sum on the date of furnishing of return of income by the .....

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of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force : Provided that in the case of interest payable by the Government or a public sector bank within the meaning of clause (23D) of section 10 or a public financial institution within the meaning of that clause, deduction of tax shall be made only at the time of payment thereof in cash or by the issue of a cheque or d .....

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on has- (i) a residence or place of business or business connection in India; or (ii) any other presence in any manner whatsoever in India. (iii) Explanation 4 to Section 9 (1) (i) of the Act:- Section 9 - Income deemed to accrue or arise in India - (1) The following incomes shall be deemed to accrue or arise in India : (i) all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from .....

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d gains of business or profession. 7.2. Section 40 (a) (i) of the Act deals with interest and other sums payable outside India. The provisions of this sub-clause made applicable to interest have been extended to payment of royalty, technical fees and any other sum chargeable under this Act. The section provides that the sums covered by the sub-clause, which are chargeable under the Act and are payable outside India, shall not be allowed as an expenditure to the assessee, unless tax is paid there .....

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nt is alien for the purpose of Section 195 (1) of the Act. 7.4. Section 195 (2) is an enabling provision, enabling an assessee to file an application before the Assessing Officer to determine the appropriate proportion of the sum chargeable and upon such determination, the tax has to be deducted under Section 195 (1) of the Act. The payment is made credited to the account of the payee. 8. The question now is, whether the assessee ought to have deducted tax at source as contemplated under Section .....

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ce or a remittance abroad, it cannot be inferred that the person making the remittance, namely, the assessee, in the instant case, has committed a default in discharging his tax withholding obligations because such obligations come into existence only when the recipient has a tax liability in India. 9.2. The underlying principle is that, the tax withholding liability of the payer is inherently a vicarious liability on behalf of the receipient and therefore, when the recipient / foreign agent doe .....

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because, the payer / assessee has not obtained a specified declaration from the Revenue Authorities to the effect that the recipent is not liable to be taxed in India, in respect of the income embedded in the particular payment, the Assessing Officer cannot proceed on the basis that the payer has an obligation to deduct tax at source. He still has to demonstrate and establish that the payee has a tax liability in respect of the income embedded in the impugned payment. 11. In the instant case, i .....

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skill or technical know-how of the processes involved or consist in the development and transfer of a technical plan or design. The parties merely source the prospective buyers for effecting sales by the assessee, and is analogous to a land or a house / real estate agent / broker, who will be involved in merely identifying the right property for the prospective buyer / seller and once he completes the deal, he gets the commission. Thus, by no stretch of imagination, it cannot be said that the tr .....

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