Sale Agents rendered Services outside India and Payment made directly through Foreign Exchange are not Taxable under India-USA DTAA: ITAT allows Disallowance u/s 40(a)(i) [Read Order]

The Delhi bench of the Income Tax Appellate Tribunal (ITAT) allowed the disallowance under Section 40(a)(i) of the Income Tax Act, 1961, and held that the sale agents rendered services outside India and payment made directly or wholly through foreign exchange are not taxable under India-USA Double Taxation Avoidance Agreement (DTAA).

The assessee is engaged in the business of manufacturing automotive die-cast components, I.C. Engine parts, and pistons for two-wheelers and four-wheelers since inception. The assessee had debited in Profit and loss account certain amounts on account of foreign commission although the assessee has treated the aforesaid payments as foreign commission/export commission.

The Assessing Officer found that services rendered by these parties are not merely for the sale of products of the assessee company but for prospecting, marketing, and providing comprehensive and integrated services. Thus, soliciting business is only a part of it. As the aforesaid would fall within the purview of section 9(l)(vii). “fee for technical services which would be liable to be taxable in India as income deemed to have accrued/arisen in India.

Accordingly, the Assessing Officer had made the disallowance considering services to be Fees for Technical Services (FTS) and that assessee was liable to deduct tax under Section 195 of the Income Tax Act which it has failed to do therefore, the disallowance under Section 40(a)(i) of the Income Tax Act was made. The Assessing Officer also made an addition of interest of section under Section 234A of the Income Tax Act.

The Commissioner of Income Tax Act (Appeal) [CIT(A)] had sustained the additions for which the assessee is in appeal challenging the additions under Section 40(a)(i)(B) of the Income Tax Act and the levy of interest under Section 234A of the Income Tax Act.

The Authorized Representative relying upon the order in favour of the assessee submitted that the issue of disallowance under Section 40(a)(i) of the Income Tax Act is covered in favour of the assessee.

The Authorized Representative concluded that since the sales agents rendered services outside India 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. Therefore, there was no requirement for deduction of tax on such remittances under Section 195 of the Income Tax Act. Hence, the disallowance made by the Assessing Officer under Section 40(a)(i) of the Income Tax Act is not tenable in law. The Co-ordinate bench held this in favour of the assessee.

The Two-member bench comprising of M. Balaganesh (Accountant member) and Anubhav Sharma (Judicial member) held that following the findings of the Co-ordinate Bench in favour of the assessee, the issue with regard to disallowance under Section 40(a)(i) of the Income Tax Act stands decided in favour of the assessee.

To Read the full text of the Order CLICK HERE

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