No obligation to deduct tax at source u/s 195 on the commission paid to non-resident foreign commission agent not liable to pay tax in India – ITAT
In a recent case, ITAT Agra has held that there was no obligation for the assessee to deduct tax at source u/s 195 of the Act on the commission payment made to non-resident recipient (foreign commission agent) who was not liable to pay tax in India.
ABCAUS Case Law Citation:
5005 (2026) (01) abcaus.in ITAT
In the instant case, the Revenue had challenged the order passed by the CIT(A) in deleting the disallowance u/s 40(a)(i) of the Income Tax Act, 1961 (the Act) made by the Assessing Officer.
The respondent assessee was a partnership firm and was engaged in the business of manufacturing and export of footwear. The return of the firm was selected for scrutiny under CASS.
During the course of assessment proceedings, The Assessing Officer observed that the assessee has debited an amount to the profit and loss account towards the commission paid outside India as the assessee failed to deduct tax on the above payments as per TDS provisions u/s. 195 of the Act.
The assessee submitted that its business entails services of foreign commission agents to deal with foreign clients and they had made payments for the foreign agents commission and trade fair expenses etc. The foreign commission agent was non-resident and had no income chargeable to tax in India.
The assessee also submitted Form 15CA of commission remittance issued by the foreign commission agent, giving details of sales. The assessee further submitted the copy of declaration by the foreign commission agent declaring that there is no PE (permanent establishment) in India, as there is no office or any staff in India. Copy of Italian citizenship of foreign agent and copy of Income-tax declaration of foreign agent was also filed. This apart, the copy of agreement executed between the foreign agent and assessee was also filed along with copies of relevant bank statements in respect of payment of commission.
However, the Assessing Officer was not satisfied with assessee’s response and the aforesaid commission paid outside India without deduction of tax at source, was disallowed u/s. 40(a)(i) of the Act and added to the income of the assessee.
Against the order of the CIT(A), the Revenue filed an appeal before ITAT and contended that the instant case was governed by the provisions of Section 195 of the Act, and not by Section 9. The deletion of the addition therefore, was based on a misapplication of law and was liable to be set aside.
It was further submitted that that Section 195 of the Act which governs the obligation to deduct tax at source on payments made to non-residents, does not stipulate the existence of a permanent establishment or business connection of the non-resident in India, nor does it make any reference to the provisions of Section 9 of the Act.
It was also submitted that as per Section 195(2) of the Act, the determination of chargeability of such ‘other sum’ is not within the domain of the payer/deductor. The law requires the payer to file an application electronically in Form 15E under Rule 29BA before the Assessing Officer for such determination. In the present case, no such application was made by the assessee, and thus, the deletion of the addition without compliance with the procedure laid down under Section 195(2) was unsustainable in law.
The Tribunal observed that the issue in hand was no more res integra. Hon’ble Supreme Court had explained the scope and ambit of section 195 of the Act. Hon’ble Apex Court had categorically held that the expression “any other sum chargeable under the provisions of the Act” in section 195 of the Act was elucidated and explained by holding that if payment is made in respect of the amount, which is not chargeable to tax under the provisions of the Act, the TDS is not liable to be deducted. Hon’ble Apex Court further observed that the decision relied upon by the Revenue was applicable when the sum or payment is chargeable to tax under the provisions of the Act. In such cases, TDS has to be deducted on the gross amount of payment and not merely on the taxable amount. The Revenue had brought nothing to conclude that the assessee’s foreign commission agent was liable to pay tax in India.
The ITAT further noted that Hyderabad Bench of the Tribunal had held that the payment of commission made to the overseas agents without deduction of tax did not attract disallowance under section 40a(ia) of the Act. Section 195 of the Act very clearly speaks that unless the income is liable to be taxed in India, there is no obligation to deduct tax. Further, section 9 does not provide scope for taxing such payment because the basic criteria provided in the section is about genesis or accruing or arising in India, by virtue of connection with the property in India, control and management vested in India.
The Tribunal opined that it was made crystal clear by the decision of Hon’ble Supreme Court that there was no obligation for the assessee to deduct tax at source u/s 195 of the Act on the commission payment made to non resident recipient (foreign commission agent), who was not liable to pay tax in India. The procedural prescriptions suggested by revenue were not required to be followed by the assessee.
As a result, the appeal of the Revenue was dismissed.
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