No TDS since Commission Income of Foreign Agent not Taxable in India: ITAT [Read Order]

The Income Tax Appellate Tribunal, Ahmedabad recently held that the provisions relating to deduction of tax at source under section 195 of the Income Tax Act is not applicable since the commission of foreign agent is not taxable in India.

In the instant case, the assessee is a private limited company engaged in manufacturing business. The assessee, in the year under consideration had claimed commission expenses of Rs. 54,06,265/- for services rendered by foreign commission agents in connection with it’s business. The AO, during assessment required the assessee to furnish details of the foreign commission agents. He was of the opinion that payment of commission was subjected to TDS. The AO disregarded the contention of the assessee and concluded that commission income to foreign parties /agents has accrued in India. AO disallowed the same and added to the total income of the assessee.

The assessee preferred an appeal to Ld. CIT(A) and submitted that foreign agents do not have a permanent establishment in India and there was no liability on the part of assessee to deduct TDS . The Ld.CIT(A) after considering the submission of assessee, observed as under: i) The agents had carried out all the activities on the foreign soil and not in India, so it cannot be said that income has accrued or arisen in India and the source of income was in India. ii) The appellant relied upon various judgments on various courts on the identical facts. The judgment of the Supreme Court in the case of CIT v. Toshoku Limited that “the commission earned by non-resident for acting as selling agent for the Indian exporter  wherein such non-resident was rendering services from outside India does not accrue in India” was relied upon. iii) The observation of AO that income is deemed to accrue or arise in India by applying provisions of Section 9 (1) (i) was also rejected. iv)It is apparent from the observations of the AO in his assessment order itself that the agents had rendered services outside India. It was held by the Ld.CIT(A) that the appellant was not liable to deduct tax on the commission paid to foreign agents.

The Revenue has preferred a second appeal before the ITAT. The main question was whether payment made to foreign agent is chargeable to tax in India. On perusal of Section 5(2) of the act, the ITAT held that the same cannot be taxed in India as income was received by foreign agents on account of services rendered by them in their respective countries and income was not accrued in India. Relying upon the decision of Hon’ble Madras High Court’s decision in CIT v. Farida Leather Co. reported in 66taxman.com 321[Mad] that foreign agent does not have the primary liability to be taxed in respect of income embedded in the receipt,  the vicarious liability of payer to deduct tax does not arise, the ITAT held that assessee was not liable to deduct TDS under section 195 of the act. The ITAT also relied upon similar judgments in PR CIT v. MGM Exports and G.E India Technology centre India P. Ltd v. Commissioner of Income Tax and Anr, held that “It can be safely concluded that commission income in the hands of foreign agent is not chargeable to tax in India in given facts and circumstances. The appeal raised by revenue is dismissed.”