TDS on Commission Payments to Foreign Agents

Dear Sir,
 
I am sharing with your goodself an important latest judgement relating to International Taxation.
 
 
ACIT vs T.Abdul Wahid & Co.(Chennai Tribunal - IT APPEAL NO. 84 and 85 OF 2014  APRIL 10, 2014)
 
 
 
ISSUES INVOLVED :-

1. Whether commission paid to non-resident agents for services rendered outside India is taxable in India ?

 
 
FACTS OF THE CASE:-

1. In this case the assessee paid commission to non resident agents for the services rendered by them outside India in procuring export orders for the assessee.

1. Assessee did not deduct any TDS on payments made to foreign agents on the plea that no services have been rendered in India by the said agents and they also had no business connection in India.

1. Assessing Officer while completing assessment invoked provisions of section 40(a)(i) read with section 195 of the Act on the commission payments made to non-residents holding that assessee has not deducted TDS on the said payments and therefore, commission is not allowable as deduction under section 40(a)(i) of the Act.

1. CIT(A) however ruled in favour of assessee and deleted the disallowance holding that sales commission paid by the assessee to the non-residents is not chargeable to tax in India and consequently, assessee is not under any obligation to deduct TDS under section 195 of the Act on the commission payments and therefore, provisions of section 40(a)(i) have no application.

 
 
REVENUE’S CONTENTIONS :-
 
Revenue contended that since payments have been made to non residents , hence TDS was deductible under Section 195 and since the assessee failed to deduct the TDS, disallowance under Section 40(a)(i) was called for.
 
ASSESSEE’S CONTENTIONS :-

1. The assessee contended that foreign agents did not render any services in India.

1. That the non resident agents had no business connection in India nor they had any permanent establishments in India and therefore provisions of section 195 had no application for the commission payments made by assessee to non-residents for the services rendered by them outside India.

1. That no managerial or technical services were provided by the said agents hence no deduction of tax under section 195 was bound to be made.

 
 
HELD:-
 
Hon’ble Chennai Tribunal discussed the various provisions of the Income Tax Act and observed and held as under :-

1. That the assessee is availing the services of certain non-resident agents for procuring export orders for the assessee for which it is paying commission. Perusal of the assessee's submissions shows that the said non-resident agents have no business connection in India nor they have any permanent establishments in India. They are procuring export orders for the assessee. Thus, the said non-resident agents are operating outside the country and all the services are rendered abroad only. In other words, though the non-residents are rendering services to the assessee, these services are rendered totally outside the country. In such a situation the payments made to such agents are not liable to be taxed in India.

1. That TDS is required to be deducted on payments to non-residents if the said payments are liable for tax in India. In the instant case, the commission payments to the non-resident agents are not taxable in India as the services are rendered abroad and the agents have no PE in India. Therefore, there is no requirement to deduct TDS on these payments. For this purpose reliance is also placed on the decision of Apex court in the case of GE India [2010] 327 ITR 456 (SC)

1. That no managerial or technical services have been provided by the said agents for the payments to be covered under Section 195.

 
 
 
 
 
Comments  :-

1. As per section 9, the basic criteria provided in the section is about accrual of or arising of income in India by virtue of connection with the property in India or control or management vested in India. Unless these conditions were satisfied, it cannot be held that income has accrued or arisen in India. Section 195 has to be read along with charging sections 4,5 and 9. The provisions contained under section 195 were not meant that the moment there is a remittance, the obligation to deduct TDS automatically arise. Hon’ble SC made this law clear in its ruling of GE India.

1. Hence just because payments have been made to agents abroad , TDS is not deductible until and unless said income is taxable in hands of non residents in India.

1. Non resident agents, procuring orders abroad, as in facts of present case, are rendering services abroad and they have no occasion to even visit India at any time. They have no presence in India in any shape which could constitute business connection in India and their services could not be treated as Technical or managerial services. However since the withdrawal of circular No.786, revenue officials have been making disallowances under Secion 40(a)(i) as if after withdrawal of said circular the said income of non resident has started arising in India.

1. Circular No. 786 only clarified the legal position and its withdrawal has not changed the legal position. Neither did the commission paid to foreign agents, for services rendered outside India, arose in India at time when circular was in operation nor did it started arising in India after withdrawal of circular. Section 9(1)(i) read with Section 4 and 5 has to be followed to come to logical conclusion and blind application of Section 195 has only led to unnecessary litigation at various levels.omege replica watches, rolex datejust replica

1. Following are some latest rulings clarifying the position in this regard:-

1. Farida Prime Tannery (P.) Ltd.- IT Appeal No. 189 (Mad.) of 201
2. Farida Shoes (P.) Ltd.- IT Appeal Nos. 190 and 191 (Mad.) of 2014, dated 28-3-2014
3. Prakash Impex v. ACIT -IT Appeal No. 8 (Mad.) of 2012, dated 30-3-2012
4. Angelique International Ltd vs DCIT (2012) 28 taxmann.com 219 (Delhi Bench)
5. ACIT vs Avon Organics Ltd. (2012) 55 SOT 260 (Hyderabad Bench)
6. ACIT vs Priyadarshini Spinning Mills (P.) Ltd. (2012) 55 SOT 432 (Hyderabad Bench)
7. ACIT vs Capricorn Food Products India Ltd. (2013) 38 taxmann.com 158 (Chennai Bench)

 
 
I am sure that your goodself would find the above ruling useful.
 
CA.ARUN GUPTA
Ex-Chairman Ludhiana Branch of NIRC of ICAI
Ex-Secretary Distt Taxation Bar Association,Ludhiana
09814104273
arunaru@yahoo.com