The Delhi High Court has held that commission payments to non-resident agents overseas are not chargeable to tax and there is no TDS required to be deducted under Section 195 of the Income Tax Act.
The bench of Justice Vibhu Bakhru and Justice Amit Mahajan has observed that there is no material on record to even remotely suggest that the non-resident, who had been paid the export commission, had any permanent establishment in India, carried on any business within the taxable territory in India, or had any business connection in India rendering them liable to pay tax.
Section 195 of the Income Tax Act requires individuals or entities (assessee) to deduct tax at source when they make certain payments to non-residents that are chargeable to tax under the Act. However, if the payment made to a non-resident is not subject to taxation under the Income Tax Act, there is no obligation on the part of the assessee to deduct or deposit any tax.
In this case, there was a dispute regarding the disallowance of Rs. 4,13,48,057 by the Assessing Officer (AO) under Section 40(a)(i) of the Income Tax Act. The AO disallowed this amount because the assessee did not deduct any tax at source (TDS) while making payments to non-residents. The controversy arose because the AO believed that TDS should have been deducted on these payments, but the assessee argued that the payments were not taxable under the Income Tax Act, and hence, no TDS was required.
The High Court, comprising Justice Vibhu Bakhru and Justice Amit Mahajan, examined the case and observed that there was no basis to suggest that the non-residents who received the payments had any taxable income in India. Therefore, the court ruled in favor of the assessee, stating that there was no requirement to deduct TDS on these payments. As a result, the disallowance made by the AO under Section 40(a)(i) was not upheld, and the assessee was not liable to pay tax on those specific payments to non-residents.
In this case, the respondent (assessee) had claimed a deduction for the expenditure incurred, which was the commission paid to agents located overseas. However, the Assessing Officer (AO) disallowed this deduction on the grounds that the assessee did not deduct tax at source (TDS) under Section 195 of the Income Tax Act while making these payments to non-resident agents.
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The AO’s argument was that since the assessee failed to deduct TDS, it disentitles them from claiming any deduction for the commission payment made to overseas agents. According to the AO, TDS should have been deducted, and the non-compliance of this requirement affected the eligibility of the deduction.
On the other hand, the assessee contended that the commission paid to overseas agents was not chargeable to tax under the Income Tax Act. They argued that since the payment was not taxable, there was no obligation for them to deduct TDS on those payments.
The Delhi High Court, comprising Justice Vibhu Bakhru and Justice Amit Mahajan, examined the case and found in favor of the assessee. The court agreed with the assessee’s argument that the commission payments made to overseas agents were not chargeable to tax under the Income Tax Act. Consequently, the court ruled that the assessee was not required to deduct TDS on those payments, and they were entitled to claim the deduction for the expenditure incurred on commission paid to non-resident agents.
In this case, the Income Tax Appellate Tribunal (ITAT) has held that the export commission paid to agents overseas was for the services rendered outside India. These agents had procured orders from abroad, and they were paid a commission for their efforts. The commission payment did not arise or accrue in India because it was related to purchase orders fulfilled outside India by the assessee.
The Income Tax Department filed an appeal challenging the ITAT’s order. They argued that even if the question of whether any income is chargeable to tax in the hands of the non-resident agent is under consideration, the payer (the resident assessee) is still required to deduct and deposit tax at source (TDS) on the payments made to the non-resident agent.
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However, the court took note of the fact that a foreign resident who does not conduct any business activities within taxable territories in India and has no permanent establishment or business connection in India is not liable to pay tax under the Income Tax Act for any amount remitted by the resident assessee (Indian company). In other words, if the non-resident agent’s income is not subject to taxation in India due to lack of business presence or connection, then there is no obligation for the payer to deduct TDS on the payments made to the non-resident agent.
Furthermore, the court observed that there were no allegations suggesting that the payments made to the non-resident agents were not genuine business expenses. As a result, the court dismissed the Income Tax Department’s appeal, upholding the ITAT’s decision that the commission payments made to overseas agents were not taxable in India, and no TDS was required to be deducted on those payments.
Case Title: PCIT Versus Maharani Enterprises
Case No.: ITA 22/2021
Date: 28/07/2023
Counsel For Appellant: Sanjay Kumar, Easha
Counsel For Respondent: Piyush Kaushik