The Delhi bench of Income Tax Appellate Tribunal (ITAT) has recently held that commission paid to US sales agents for selling products in the US should not be disallowed under Section 40(a)(i) of the Income Tax Act, 1961.
Assessee Sunbeam Auto Ltd. is a private limited company engaged in the business of manufacturing automotive die cast components, IC engine parts and pistons for two wheelers and four wheelers.
After filing the return, the assessee case was selected for scrutiny and assessment was completed under Section 143(3) of the Income Tax Act along with disallowing the foreign commission paid to the non-resident agent who worked for assessee for selling products in the US.
Aggrieved assessee filed appeal before the CIT (A). The CIT (A) confirmed the action of AO. Thereafter, the assessee filed a second appeal before the tribunal.
Shashi M Kapila-counsel for the assessee submitted that assessee has paid commission to these two agents under the same agreement since Assessment Year 2004-05 which has been allowed in assessments framed under Section 143(3) of the Income Tax Act for Assessment Year 2005-06 to Assessment Year 2010-11.
It was also submitted that, since the sales agents rendered services outside India and that they had no ‘business connection’ or PE and that they are tax residents of the USA, the payments made and remitted directly to them in foreign exchange are not taxable under the provisions of India-USA DTAA.
Umesh Takyar, counsel for the revenue submitted that services provided by the said parties fall within the purview of Fees for Technical Services or FTS as per Section 9(1)(vii) of the Income Tax Act and Fees for Included Services as per Article 12(4) of India-USA DTAA. .
As per the above provisions, assessee is liable to deduct tax under Section 195 but assessee failed to do. Hence disallowance under Section 40(a)(i) of the Act has been passed by the AO.
The tribunal relied upon the decision of the case Panolfa Autoelektrik observed that “commission paid by the assessee to its foreign agent for arranging of export sales and recovery of payment could not regarded as fees for technical services under section 9(1)(vii) of the Act”. This decision entirely applies to the facts of the assessee’s case.
It was also observed that there is no information relating to the nature of technical, managerial or consultancy services provided by any of the two agents to the assessee. Revenue did not record any such information.
The foreign agents are appointed for arranging of export sales and recovery of payments on commission basis.
Finally, the two-member bench of G.S. Pannu, (President) and Astha Chandra, (Judicial Member) allowed the appeal filed by the assessee and held that disallowance under Section 40(a)(i) of the Act made by the AO and then confirmed by the CIT(A) is not sustainable.
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