No Disallowance of Expenditure for Non-Deduction of Tax on Services and Payments Made Outside of India: ITAT [Read Order]

The Jaipur bench of the Income Tax Appellate Tribunal ( ITAT ) has ruled that, No Disallowance of Expenditure for Non-Deduction of Tax on Services and Payments Made Outside of India.

The ITAT has also said that in the instant case payments have been made outside of India, there was no liability to deduct tax at source u/s 195(1) of the Income Tax Act as these payments are not chargeable to tax and the provisions of section 40(a)(ia) Income Tax Act cannot be invoked.

The assessee is engaged in the business of manufacturing of wire and other products made of various metals including Nickel, Copper, Iron, Chromium etc. The assessee has made a payment towards selling commission on export sales, Exhibition Expenses and Testing Expenses to various non-resident entities, without deduction of tax at source. During the course of assessment proceedings, the assessee was asked to explain as to why these payments should not be disallowed u/s 40(a)(ia) in view of insertion of Explanation 2 to Section 195 of the Act.  The assessee submitted that the payments were made to the non- residents towards the services rendered outside India hence, no income has accrued or arisen in India, therefore, no tax was required to be deducted u/s 195 of the Act. However, the AO rejected the submission filed by the assessee. Being aggrieved, the assessee carried the matter in appeal before the CIT(A) who has confirmed the addition.

The assessee is submitted in the light of judgment in case of CIT vs.Toshoku Ltd (1980) 125 ITR 0525 (SC) that in the context of Section 195 of the Act which deals with the liability of the payer to deduct tax at source on the specified payments made to a non-resident, such payments can be said to be sum chargeable under the provisions of this Act only if it is established that such payment was taxable u/s 4, 5 and 9 of the Act. Therefore, commission paid to a 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 does not fall in the scope of the total income of non-resident and consequently, it is not chargeable to tax in India under the provisions of the Act. Accordingly, when the amount paid by the assessee is not chargeable to tax in India then the assessee is not liable to deduct TDS. So it is fully established that the subjected amounts received by the respective payees, were not the income chargeable to tax in India, hence s. 195 of the Act was not applicable in this case.

While allowing the appeal filed by the assessee, the ITAT bench comprising of Judicial Member Vijay Pal Rao and Accountant Member Vikram Singh Yadav held that in the present case, undisputed facts are that the commission has been paid to various non-resident entities in respect of sales effected by the assessee outside of India, the services have been rendered outside of India and the payments have been made outside of India. In light of these undisputed facts, in the instant case and such commission payment cannot be held chargeable to tax in India. Similarly, the exhibition expenses have been paid in respect of participation in various exhibitions held outside of India and even the testing charges have been paid for testing services outside of India. Therefore, these payments will not fall in the category of income which has accrued or arisen or deemed to accrued or arise in India. Further, payments have been made outside of India, there was no liability to deduct tax at source u/s 195(1) as these payments are not chargeable to tax and the provisions of section 40(a)(ia) cannot be invoked in the instant case.