Commission paid to non-resident outside India for the services rendered outside India will not fall in the category of the income received for deemed or received in India as well as accrues or arises or is deemed to accrue or arise in India
ABCAUS Case Law Citation:
ABCAUS 2968 (2019) (05) ITAT
Important Case Laws Cited/relied upon by the parties:
CIT vs. EON Technologies (P) Ltd. 343 ITR 366
Armayesh Global vs. ACIT 51 SOT 564.
The appeal by the assessee was directed against the order of the CIT(A) in sustaining addition being disallowance of commission paid to non residents u/s 40(a)(ia) of the Income Tax Act, 1961 (the Act) for non deduct tax at source.
The assessee was partnership firm. During the assessment proceedings, the Assessing Officer (AO) noted that the assessee had paid commission to various nonresident entities without making TDS. Accordingly, the AO has proposed to make disallowance of the said commission by invoking the provisions of Section 40(a)(i) r.w.s. 195 of the Act.
In response the assessee submitted that the assessee was engaged in the business of export of its products and for this purpose, the assessee had tie up with non-resident persons for procuring the sales orders on behalf of the assessee.
It was explained that after exporting the goods and receiving the payment in foreign currency, the assessee paid commission to such non-resident persons for services rendered outside India. Thus the assessee contended that the payment made by the assessee to non-resident was not liable to tax in India and therefore, the assessee was under no obligation to deduct TDS and consequently the provisions of Section 40(a)(i)of the Act could not be invoked.
The AO did not accept this contention of the assessee and referred to the Explanation II of Section 195 (1) of the Act inserted by Finance Act, 2012 on the point that whether the non-resident person had placed of business or business connection in India the provisions of Section 195(1) were applicable.
The AO accordingly, held that the provisions of Section 195(1) were applicable in all the cases whether the payment is made to non-resident without deduction of TDS and consequently the provisions of Section 40(a)(i)are attracted.
The AO then proceeded to hold that the payment in question is Fee for Technical Services (FTS) as the assessee had made this payment for rendering managerial or consultancy services by the nonresident persons. The AO accordingly disallowed the commission paid u/s 40(a)(i)of the Act.
The assessee challenged the action of the AO before the CIT(A) but could not succeed.
The Tribunal observed that the payment in question was commission and prima facie not royalty or Fee for Technical Services (FTS). The AO though observed that the payment in the nature of FTS, however the AO had not examined or not given the finding as to how the payment in question is FTS and what was the nature of service rendered by the non-resident.
The Tribunal noted that the CIT(A) for the preceding assessment year had clearly given a finding that the payment in question was not fee for technical services but it is a regular payment to the non-resident in the nature of ordinary course of business. Even otherwise the CIT(A) had upheld the order of the AO only on the ground that as per the explanation-II of Section 195(1) of the Act the assessee was under obligation to deduct the tax at source for making the payment of commission to non-resident. Therefore, the ld. CIT(A) has accepted the nature of payment as commission and not fee for technical service.
The Tribunal observed that once the payment in question was commission then the provisions of Section 40 (a)(i) of the Act were applicable only if such sum is chargeable to tax under this Act. As per provisions of Section 5(2) of the Act the total income of non-resident includes all income from whatsoever sources derived which is received or deemed to be received in India accrues or arises or is deemed to accrue or arise to him in India during such year.
The Tribunal opined that commission paid to non-resident outside India for the services rendered outside India will not fall in the category of the income received for deemed or received in India as well as accrues or arises or is deemed to accrue or arise in India. Thus, the said amount paid to non-resident did not fall in the scope of total income of nonresident and consequently it was not chargeable to tax in India under the provisions of the Act.
The Tribunal opined that even otherwise the said income in the hands of non-resident had to be considered in the light of the provisions of DTAA between India and the Country of the non-resident. In the absence of P.E. of the non-resident in India such business income was not chargeable to tax in India.
Accordingly, the Tribunal held that in the facts and circumstances of the case when the amount paid by the assessee was not chargeable to tax in India then the assessee was not liable to deduct TDS and consequently the provisions of Section 40(a)(i) of the Act could not be invoked for making the disallowance.
