No TDS on Commission Paid to Non-Resident Agents for their Services outside India: ITAT [Read Order]

In ACIT vs. M/s. Manufax (India), the Agra Bench of the Income Tax Appellate Tribunal held that the assessee is not liable to deduct tax at source ( TDS ) when the non-resident agent provides services outside India on payment of commission.

The assessee is engaged in the business of manufacture and export of shoes. During the assessment proceedings the Assessing Officer made an addition of Rs.70.5 lacs in respect of commission paid by the assessee to foreign agents. The A.O. was of the view that as certain withdrawal of circulars by CBDT, the income arising to the income arising to foreign agents on account of export commission falls u/s 5(2) (b) of the Income-tax Act, as the income had accrued in India when the right to receive the income became vested. Thus, the A.O. held that provisions of section 195 are applicable in respect of payments of Commission on which basis, amount of Rs.70,54,210/- was disallowed u/s 40(a)(i) of the I.T. Act and added to the income of the assessee.

On assessee’s appeal to the CIT(A), the disallowance was deleted. Revenue appealed to the ITAT. The Departmental Representative (D. R) argued that the deletion made was wrongful as the CIT(A) had ignored the fact that the commission paid to foreign commission agents is deemed to accrue or arise in India, which required deduction of tax as per section 195 of the I.T.Act. The Counsel for the assessee reiterated the order of the CIT(A).

As per the CIT(A), section 195 of the Act, clearly speaks that unless the income is liable to be taxed in India, there is no obligation to deduct tax and in order to determine whether the income could be deemed to be accrued or arisen in India, section 9 of the Act is the basis. The CIT(A) noted that an overseas agent of Indian exporter operates in his own country and no part of his income arises in India and his commission is usually remitted directly to him by way of TT or posting of cheques/demand drafts in India and therefore the same is not received by him or on his behalf in India and such an overseas agent is not liable to income-tax in India on these commission payments. The CIT(A) also found that as per section 237 read with section 199 of the Act implies that only the recipient of the sum i.e., payee would seek a refund and no tax is deductible under section 195 of the Act on commission payments and consequently the expenditure on export commission payable to non-resident for services rendered outside India becomes allowable expenditure and the same as outside rigors of the section 40a(ia) of the Act.

Upon finding that the D.R has placed nothing on record to establish that the nonresident commission agents have rendered services or performed any activity in India, the CIT(A) concluded that no business connection as stipulated in section 9(1)(i) of the Income Tax Act existed.

The ITAT bench comprising of Judicial Member A.D. Jain & Accountant Member Dr. Mitha Lal Mena relied on the decision of the bench in ACIT vs. M/s. Virola International and confirmed the decision of the CIT(A).