No TDS required to be deducted on sales commission paid to non-residents for services rendered outside India

Tribunal Verdict and summary of judgement:

Where the commission has been paid to various non-resident entities in respect of sales affected by the assessee outside India, the services have been rendered by these entities outside India and the payments have been made outside India. Therefore, commission paid to resident outside India for the services rendered outside India will not fall in the category of the income received or deemed to be received in India as well as accrues or arises or is deemed to accrue or arise in India. Such commission payment or part thereof cannot therefore be held chargeable to tax in India and in absence of any income chargeable to tax, there was no liability to deduct tax at source u/s 195 and the provisions of section 40(a)(i) cannot be invoked in the instant case.

Facts of the case:

Relying on Explanation 2 to Section 195(1) introduced by the Finance Act, 2012 with retrospective effect from 01-04-1962, the AO held that the payment of sales commission by the assessee is nothing but a fee which has been paid by the resident assessee to non-resident for technical services rendered by him holding that the commission was fee for technical services and the assessee was required to deduct tax at source on the said payment. He therefore, disallowed the sum of Rs. 99,84,435/- by applying the provisions of section 40(a)(i) of the Act.

Submission by DR:

• As per the provisions of section 195 read with Explanation II to the said section, it is clarified that: -

“the obligation to comply with sub-section (1) and to make deduction there under applies and shall be deemed to have always applied and extends and shall be deemed to have always extended to all persons, resident or non-resident, whether or not the non-resident person has (i) a residence or place of business or business connection in India; or (ii) any other presence in any manner whatsoever in India.”

•   Further, section 9(1)(vii) would classify and cover all incomes as accruing and arising in India which partake character of payment on account of ‘Fee for Technical services’, which is turn, has been defined to include any payment for rendering of any managerial or consultancy services rendered by the non-resident agent. In the instant case, since, the assessee was not able to sell his goods on his own offshore, he has to engage the managerial acumen and expertise of the non-resident in lieu of a consideration, termed as ‘commission’.
• This is to say that the payment by the resident assessee in connection with his business in India to a person outside India making use of his expertise in sale of similar goods in a particular country in nothing but a fee which has been paid by the resident assessee to the non-resident for the technical services rendered by him.
• Thus, the payment is squarely covered by the provisions of section 195 of the Act. In view of these provisions, the provisions of section 40(a)(i) are also attracted wherever TDS on payment of commission to a non-resident has not been made.

Submission by assessee: -

• In number of cases, it has been held that payment of commission to foreign agents is not fee for technical services. Foreign commission agents have neither any control over the export activity of the assessee nor they are final authority in respect of the same. They only perform subsidiary function outsourced to them for saving the cost and convenience.
• The assessee duly filed certificates from the recipients of commission that the commission received by them was their business income and they were not having any permanent establishment in India.
•   In support, the assessee placed reliance on the following decisions: -

1. Pr. CIT vs. Motif India Infotech 409 ITR 178 (Guj)
2. Nova Technocast reported in 166 DTR (Guj) 426
3. CIT vs. Farida Leather Company reported in 287 CTR 565 (Madras)
4. Evolv Colthing Company vs. ACIT 407 ITR 729 (Mad.)
5. Subhash Chand Gupta vs. ACIT 58 Tax World 176 (Jp)

• It was submitted that the payment of commission to agents by the assessee is in the nature of business profits in the hands of the recipients and as per the relevant article of DTAA (Article 7) business profits are taxable only in the country of such enterprise unless enterprise has a permanent establishment (PE) situated in India. The parties to whom commission have been paid by the assessee are not having PE in India.
• The AR for the assessee further referred the case of Jaipur Bench of ITAT in Satyam Polyplast Vs. DCIT 106 Taxmann.com 145 (Jpr. Trib) as below: -

• Further, the AR relied upon the decision of ITAT Jaipur in case of JLC Electromet P. Ltd. Vs. ACIR reported in [2019] 75 ITR (Trib) 13.
• It was submitted that reliance placed by the AO on Explanation (II) to section 195(1) of the Act is misplaced. From the provisions of section 195(1), it is clear that any person responsible for paying to a non-resident any interest or any other sum chargeable to tax under the provisions of the Act, shall, at the time of credit of such income to the account of payee, deduct income tax. Thus, it is quite clear that tax is required to be deducted at source from the element of income embedded in the total payment being made by the person responsible in respect thereof, to the non-resident entity. If the amount paid by the assessee is not chargeable to tax in India in respect of the payee, no tax is required to be deducted at source.
• Reliance in this regard is placed on the decision of Hon’ble Supreme Court in the case of GE (India) Technology Centre (P) Ltd. Vs. CIT reported in 327 ITR 456, where it has been held by the Hon’ble Supreme Court that “The most important expression in section 195(1) of the Income Tax Act, dealing with the deduction of tax at source consists of the words “chargeable under the provisions of the Act.” A person paying interest or any other sum to a non-resident is not liable to deduct tax if such sum is not chargeable to tax under this Act.
• Further in the case of Vijayship Breaking Corporation Vs. CIT reported in 314 ITR 309: Held by the Hon’ble Supreme Court that if the contention of the department that the moment there is a remittance the obligation to deduct TDS arises is to be accepted, then we are obliterating the words “chargeable under the provisions of the Act” in section 195(1). The said expression in section 195(1) shows that remittance has got to be of a trading receipt, the whole or part of which is liable to tax in India. The payer is bound to deduct TDS only if tax is assessable in India. If tax was not assessable, there is no question of TDS being deducted.
• Further attention was also invited to Instruction No. 2/2014 dated 26.02.2014 issued by CBDT, Circular No. 728 dated October 31, 1995, Circular No. 3/2015 dated 12.02.2015.

Read detailed Circular at this link: Circular No. 3/2015 dated 12.02.2015

Observations of Tribunal:

The Tribunal said that the Coordinate Bench in case of JLC Electromet P. Ltd. Vs. ACIT has dealt with identical issue of disallowance of commission payments to non-residents u/s 40(a)(i) where it was held as under: -

• The AO has not disputed the nature of payments made by the assessee to the non-resident entities and also the fact that the services have been rendered outside of India. The only reason why the AO has disallowed these expenses is in view of Explanation 2 to Section 195.
• Section 195(1) provides that any person responsible for paying to a non-resident, not being a company or to a foreign company, any interest or any other sum chargeable under the provisions of this Act shall deduct income tax thereon. Therefore, what needs to be examined in the instant case is whether the commission payment is chargeable to tax under the Act or not.
• We find that Explanation 2 to Section 195 talks about the person who is making payment rather than the person who is receiving the payment as the obligation to comply with sub-section (1) is on the person who has to deduct TDS while making or crediting payment to the account of the payee.
• The explanation provides that the obligation to deduct tax at source applies to all persons but it doesn’t and cannot take away the fundamental requirement under law which is that the sum has to be chargeable under the provisions of the Act.
• We therefore find that reading of the said explanation by the lower authorities is not correct and only in a scenario, the payment is chargeable to tax, the tax is required to be deduced at source. The said position has also been clarified in the memorandum explaining the provisions of the Finance Bill, 2012.
• Further, the Tribunal said that the taxability of commission payment has recently been examined by the Co-ordinate Bench in case of Satyam Polyplast Vs. DCIT. We have already discussed this case above.
• Therefore, commission paid to non-resident outside India for the services rendered outside India will not fall in the category of the income received or deemed to received in India as well as accrue or arise or is deemed to accrue or arise in India. Thus, the said amount does not fall in the scope of total income of non-resident and is not chargeable to tax in India. Accordingly, the assessee is not liable to deduct TDS and consequently the provisions of section 40(a)(i) of the Act cannot be invoked for making the disallowance.

Click to read the complete order: Modern Threads India Limited Vs. ACIT