A division bench of the Delhi Income Tax Appellate Tribunal (ITAT), on Thursday held that the provisions of section 195 of the Income Tax Act, 1961 will not attract in case of foreign agency commission paid outside India for promotion of export sales outside India.
Assessee- firm is engaged in the business of manufacturing and export of plain and studded Gold and Silver jewellery. For the assessment year under consideration, the AO, by invoking section 40(a)(ia), disallowed a sum of commission expenses on ground that the assessee has not deducted tax on such foreign agency commission as per the provision of section 195 of the Income Tax Act.
On appeal, the assessee submitted that the foreign agents appointed by them provide services from their respective country and for the work done by them, payment of commission is directly remitted to them in their country. According to them, no part of their income accrues or arises in India under the provisions of section 5(2) read with section 9(1) of the Income Tax Act since these agents operate outside India and they do not have any permanent establishment or business connection in India. Further, since the payment is directly remitted to these agents in their countries it cannot be held to have been received by or on behalf of the agents in India and hence these agents are not liable to income tax in India on the commission received by the, from the assessee firm.
The bench noticed the decision of the Ahmedabad Tribunal in the case of Welspun Corporation Ltd. Wherein it was held that the payments made by the assessee for services rendered by non-resident agents could not be held to be fees for payment for technical services since these payments were in nature of commission earned from services rendered outside India which had no tax implications in India.
Further, the Allahabad High Court in the case of Model Exims, has held that failure to deduct tax at source from payment to nonresident agents, who has their own offices in foreign country, cannot be disallowed, since the agreement for procuring orders did not involve any managerial services
Citing a catena of decisions, the bench observed that the assessee is not liable to deduct tax under the provisions of section 195 of the Income Tax Act on account of foreign agency commission paid outside India for promotion of export sales outside India.
Read the full text of the Order below.
