Chandra Poojari, Accountant Member - This appeal by the Revenue is directed against the order of the Commissioner of Income-tax(Appeals) dated 28.1.2015.
2. The only ground raised in this appeal is with regard to disallowance of export sales commission of Rs. 1,08,45,346/- paid to non-resident by invoking the provisions of sec.40(a)(i) of the Act.
3. The assessee paid the above amount to various non-residents without deduction of TDS is not justified treating the same as export sales commission. Therefore, the Assessing Officer invoked the provisions of sec.40(a)(i) r.w.sec.195 and disallowed the same.
4. The Ld. DR submitted that the selling agent in this case though had rendered services abroad, was entitled to receive the commission for the services rendered to the assessee and received the amount through or from business connection which it had in India and source of income is in India. Being so, the income shall be deemed to accrue or arise in India. Since the source of income of the non-resident, who is the agent of the assessee, it earned commission from the business activity of the assessee and the assessee has not deducted TDS, it should be disallowed u/s. 40(a)(i) of the I.T. Act. The services rendered by the agent falls within the ambit of Explanation (2) of sec. 5 of the I.T. Act. The fact that the agent has rendered services abroad in the form of soliciting orders and the commission is to be remitted to them abroad is wholly irrelevant for the purpose of determining the situs of their income. According to the ld. DR, non-deduction of TDS towards this income is to be disallowed.
5. On the other hand, the Ld. AR submitted that the income accrued outside India for the services rendered for marketing and the recipient of the commission has no business connection in India, what is paid to the non-resident is not taxable in India. Hence, there is no question of TDS from that payment. According to the ld. AR, this issue is squarely covered by the judgment of the Madras High Court in the case of CIT v. Faizan Shoes (P.) Ltd. [2014] 367 ITR 155/226 Taxman 115/48 taxmann.com 48, wherein it was held, "dismissing the appeal, that on a reading of section 9(1)(vii), commission paid by the assessee to the non-resident agents would not come under the term "fees for technical services". For procuring orders for leather business from overseas buyers. Wholesalers or retailers, as the case may be, the non-resident agent was paid 2.5 per cent commission on free on board basis. This was a commission simpliciter. What was the nature of technical service that the non-resident agents had provided abroad to the assessee was not clear from the order of the Assessing Officer. The opening of letters of credit for the purpose of completing the export obligation was an incident of export and, therefore, the non-resident agent was under an obligation to render such services to the assessee, for which commission was paid. The non-resident agent did not provide technical services for the purposes of running of the business of the assessee in India. Therefore, the commission paid to the non-resident agents would not fall within the definition of "fees for technical services" and the assessee was not liable to deduct tax at source on payment of commission".
5.1 The ld. AR, further submitted that the services rendered by the non-resident agent could at best be called as a service for completion of the export commitment and would not fall within the definition of "fees for technical services" and, therefore, section 9 was not applicable and, consequently, section 195 did not come into play. Therefore, the disallowance made by the Assessing Officer towards export commission paid by the assessee to the non-resident to be deleted."
5.2 According to the ld. A.R., the income has been accruing outside India for the services rendered for marketing assessee's products in abroad and recipient has no business connection in India, what is paid to the agent is not taxable in India, hence, there is no question of deduction of tax at source from that payment and no assessment of recipient has been made in India. Further, he submitted that only when the income of the agent is chargeable to tax under the provisions of the Act, then only the assessee is liable to deduct TDS as per sec. 195C of the I.T. Act. The person paying the commission to a non-resident is not liable to deduct tax if such services are not chargeable to tax under the Act. Sec. 195 contemplates not merely amounts, the whole of which are pure income payments; it also covers composite payments which have an element of income embedded or incorporated in them. The obligation to deduct tax at source, is however, limited to appropriate proportion of income chargeable under the Act forming part of the gross sum of money payable to the non-resident.
5.3 The Ld. AR further submitted that income though accrued in India, the services were rendered to the assessee abroad and the payments were also received by them abroad, therefore, no income would arise under the provisions of sec. 9(1) of the Act.
6. We have heard the parties and perused the record. At the outset, certain provisions of the Act needs to be looked into section 40(a)(i) which reads as under:—
"40 Not withstanding
(a) In the case of any assessee -
(i) Any interest (not being interest on a loan issued for public subscription before the 1st day of April, 1938) royalty, fees for technical services or other sum chargeable under this Act, which is payable
A. Outside India -
B. In India to a non-resident, not being a company or to a foreign company, On which tax is deductible at source under Chapter VIIB and such tax has not been deducted or, after deduction, has not been paid during the previous year, or in the subsequent year before the expiry of the time prescribed under sub-section (1) of section 200:"
7. The aforesaid clause makes it clear that the disallowance shall be made in case of any payment made which is chargeable under this Act and is payable outside India or in India to a non- resident not being a company or to a foreign company on which tax is deductible at source. Therefore, the first condition required to be fulfilled is the payment must be chargeable under the Act, thereafter the question of deduction of tax will arise. Section 195 (1) of the Act also prescribes that tax has to be deducted while making payment to non-resident which is chargeable under the provisions of the Act. Therefore, the condition precedent for deduction of tax is the income must be chargeable under the provisions of the Act. In the facts of the present case, the assessee has not produced the agreement entered into by the assessee with foreign agents to show that they were appointed to act as Commission agents outside India in their respective countries. The AO has disallowed commission payment u/s 40(a)(i) of the Act, since, there was no agreement to suggest the payment of sales commission.
8. As seen from the order s of the lower authorities, the assessee has not discharged the burden cast upon it to show the nature of services rendered by non-resident agent. If there are services rendered by non-residents, who have no permanent establishment in India or have any business connection in India, by virtue of which the payment of commission accrued or arose in India then, it is exempted, if the assessee is able to prove that the services were rendered by those non-residents at abroad. In the present case, the assessee has not established the facts on record that the non-resident has rendered services at abroad and there is no business connection in India by producing relevant records, viz., either agreement entered into by the assessee with them or correspondence took between the parties. Without examining these details, we are not in a position to decide the nature of services rendered by the non-resident agent. Therefore, it is appropriate to remit the entire issue back to the file of the AO with direction to the assessee to prove that it was sales commission towards procurement of orders from abroad. Accordingly, the entire issue is remitted back to the file of the AO for fresh consideration and the AO is directed to make necessary enquiry regarding the nature of services rendered by the non-resident agent and the payments made thereof. With these observations, the appeal is allowed for statistical purposes.
9. In the result, the appeal of the Revenue is allowed for statistical purposes.