Commission paid to agents outside India does not fall u/s 9(1)(vii) in absence of any Services of Technical Nature: ITAT sets aside Disallowance made by AO [Read Order]

The Delhi bench of the Income Tax Appellate Tribunal (ITAT) observed that Commission Paid to Agents Outside India does not Fall under section 9(1)(vii) of the Income Tax Act, 1961 in the absence of any services of a technical nature and set aside the disallowance of expense made by the Assessing Officer (AO).

Bhartiya International Ltd,  the assessee challenged the final assessment order dated 29.07.2022 passed under Section 143(3) r.w. Section 144B r.w. Section 144C(13) passed in pursuance of directions issued by the Dispute Resolution Panel (DRP) dated 02.06.2022 read with rectification order dated 28.06.2022 passed by DRP under Rule 13 of the Dispute Resolution Panel Rules, 2009.

In the draft assessment order, the AO observed that the assessee has claimed Rs.11,90,44,517/- towards commission, brokerage and discount expenses. The party-wise details of expenses along with details of TDS deducted if any was called for. The reply of the assessee was obtained. It was alleged in the draft assessment order that the assessee has not provided any details of the TDS deduction made on these expenses.

The assessee pointed out that commission expenses have been incurred for procurement of export orders, i.e., for earning income outside India for which the services have been rendered by the overseas commission agents outside India and no services have been rendered in India. Party-wise break up of payments to agents situated outside India was provided and it was pointed out that similar payments have been made to these very parties in the earlier years too for obtaining such services of commission agents.  

The AO observed that the services rendered by these foreign commission agents also include ‘quality checks’ which require technical expertise such payments thus fall within the ambit of ‘fee for technical services’ and such services are being utilized for business carried out in India or for earning any income from source in India and consequently such services are subjected to withholding tax provisions under Section 195 of the Act.

 The DRP viewed that the Assessing Officer ought to have passed a reasoned order while making additions on the grounds of failure to deduct TDS on such payments. The DRP thus accordingly issued directions to the AO to incorporate a  factual and legal position on the issue of the doctrine of consistency and also directed the AO to revisit the copies of the agreement to ascertain the factum of quality checks purportedly carried out by the foreign agents. 

The AO viewed that failure to deduct TDS under Section 195 of the Act will lead to disallowance of such expenses by operation of law. The AO accordingly disallowed an amount of Rs.11,64,88,755/- towards commission expenses claimed as business expenses.

The Counsel also pointed out that commissions paid to foreign entities for procurement of export orders are not susceptible to Indian taxation and consequently in the absence of any income chargeable to tax in India, no obligation to deduct withholding tax arises in India. The provisions of s. 40(a)(i) are not triggered in the absence of any liability to tax in India as attributable to commission income in the hands of foreign entities as held in a plethora of judicial pronouncements.  The disallowance of export commission expenses owing to non-deduction to tax at source on such remittances is in controversy.

Under the provisions of section 195 of the Act, taxes must be deducted at source on the payments made to non-residents, only if the income payable to the non-resident is chargeable to tax in India. The income is chargeable to tax in India in the hands of the non-resident where the income received or deemed to have been received in India or the income has accrued or arisen or deemed to have accrued or arisen in India.

A two-member bench comprising Shri Saktijit Dey, Vice President & Shri Pradip Kumar Kedia, Accountant Member observed that the overseas agents were paid commission for securing orders etc., and such services were utilised to make or earn income from a source outside India, the assessee is under no obligation to apply with provisions of Section 195 of the Act for the reasons that commission to such overseas agents are not taxable under the Act. The AO has not alleged or established anything to the contrary. The AO was thus not justified to disallow such commission expenses under the Act.

The  ITAT allowed the appeal and set aside the order of AO which Disallow the expense on commission.

To Read the full text of the Order CLICK HERE

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