Commission to Foreign Agents for Overseas Services Not Taxable in India: ITAT Rules TDS Not Applicable [Read Order]

The Chandigarh Bench of Income Tax Appellate Tribunal ( ITAT ) held that Tax Deducted at Source (TDS ) was not applicable on commission payments made to foreign agents for services rendered outside India.

Orbit Resorts Limited,appellant-assessee, was engaged in the hospitality sector, managing luxury hotels including The Oberoi and Trident in Gurgaon. The company, based in Chandigarh, filed its return declaring a loss of Rs. 3,29,41,29,614 for the Assessment Year 2012-13. The case was selected for scrutiny under section 143(3) of the Income Tax Act, 1961.

During the assessment, the Assessing Officer (AO) observed that the assessee had furnished only two out of several agreements entered with foreign entities. On examining these, particularly the agreement with Trust International, the officer noted that the assessee was responsible for taking necessary measures and obtaining approvals to enable Trust to perform services for clients.

Based on this, the officer held that the payments described as commission were actually fees for technical services (FTS), as the services involved specialized expertise and customer data used for business promotion.

The AO further noted that since the services qualified as FTS, tax was required to be deducted at source. In response, the assessee stated that no TDS was deducted since the foreign agents had no business operations or permanent establishment in India and the services were rendered outside the country. It was, therefore, contended that the income was not taxable in India.

The AO, however, rejected this explanation and, relying on the judgment of SKF Boilers and Driers Pvt. Ltd., treated the payments as FTS subject to TDS.

The assessee had challenged the order of the AO before the Commissioner of Income Tax (Appeals) [CIT(A)]. The CIT(A) examined the issue and referred to Section 9 of the Act, which deals with income deemed to accrue or arise in India.

It was observed that while the assessee claimed there was no business connection in India and that the payments made to foreign agents were in the nature of commission for facilitating sales, not FTS, the facts of the case indicated otherwise.

The CIT(A) noted that although the agents rendered services outside India by sourcing customers, their right to receive commission arose only when those customers stayed at the assessee’s hotel in Gurgaon and made full payments in India. Accordingly, it was held that the commission income had its source in India and was taxable under Sections 5(2)(b) and 9(1)(i) of the Act.

The CIT(A) further observed that the assessee had failed to produce any documents supporting eligibility for Double Taxation Avoidance Agreement (DTAA) benefits. Relying on the decisions in SKF Boilers and Driers Pvt. Ltd. and Rajiv Malhotra (284 ITR 564), the CIT(A) upheld the addition made under Section 40(a)(ia) of the Act.

Dissatisfied with the order, the assessee filed an appeal before the tribunal.

The two member bench comprising Rajpal Yadav (Vice President) and Krinwant Sahay (Accountant Member) examined the submissions and materials on record and held that the commission paid by the assessee to foreign agents was income earned outside India for services rendered abroad. It observed that the agents had no permanent establishment in India, and hence, their income was not taxable in India.

The appellate tribunal stated that since the income was not taxable in India, there was no need to deduct TDS on such payments. It found the order of the CIT(A) on this issue unjustified and, after considering the case laws cited, held that TDS was not applicable on commission payments made to foreign agents for services rendered outside India. The appeal was therefore allowed in favour of the assessee.

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