The Ahmedabad Bench of the Income Tax Appellate Tribunal (ITAT) has held that commission paid to non-resident agents for procuring export orders is not taxable in India when the agents rendered their services outside India and had no permanent establishment or business operations in the country.
The bench of Dr. B.R.R. Kumar (Vice-President) and Rahul Chaudhary (Judicial Member) ruled that the Indian exporter was not required to deduct tax at source under Section 195 of the Income Tax Act, 1961, and deleted the disallowance of Rs. 9.66 lakh made under Section 40(a)(i).
During the original assessment proceedings under Section 143(3), the Assessing Officer noticed that the company had paid commission amounting to Rs. 9,66,471 to non-resident agents without deducting tax at source.
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The commission was paid to foreign agents for procuring export orders. The Assessing Officer concluded that the company had failed to discharge its tax-deduction obligation and consequently disallowed the expenditure under Section 40(a)(i).
The first appellate authority initially upheld the Assessing Officer’s action. In an earlier round of litigation, however, the ITAT remitted the issue to the Assessing Officer through an order dated May 25, 2022, with a direction to decide the matter in accordance with law.
During the set-aside assessment proceedings, the company furnished its explanation and supporting documents. The Assessing Officer nevertheless repeated the addition of Rs. 9,66,471 on account of the foreign commission.
The company challenged the fresh assessment order before the CIT(A), NFAC.
The appellate authority examined whether commission paid to foreign agents for procuring export orders was chargeable to tax in India and whether the company was consequently required to deduct tax under Section 195.
The NFAC noted that the company had not approached the Assessing Officer under Section 195(2) for a determination permitting deduction at a nil or lower rate before making the payments.
It held that the company could not unilaterally decide that the payments were not taxable in India merely on the basis of its own assessment of their chargeability.
Although the services were rendered outside India, the NFAC reasoned that the commission became due and payable upon the execution of export orders in India. According to it, the source of the commission income was therefore situated in India and the right to receive the commission was directly connected with the company’s Indian business operations.
Relying on rulings including Rajiv Malhotra and SKF Boilers and Driers Private Limited, the NFAC held that the commission was taxable in India because the foreign agents’ right to receive the payment arose in connection with export sales undertaken by the Indian company.
It consequently upheld the disallowance under Section 40(a)(i).
Before the ITAT, the company contended that the foreign agents had rendered their services entirely outside India. It submitted that the agents neither maintained a permanent establishment nor carried on any business operations within India.
The company placed agreements, invoices and other supporting documents on record to establish the nature of the services and the place where those services were performed.
It argued that the commission paid to the foreign agents was not chargeable to tax in India. Consequently, no obligation to deduct tax under Section 195 arose, and the expenditure could not be disallowed under Section 40(a)(i).
The company also relied upon the Supreme Court’s judgments in CIT v. Toshoku Ltd. and GE India Technology Centre Private Limited v. CIT.
The Tribunal observed that the central issue was whether the commission paid to the non-resident agents was chargeable to tax in India and, consequently, whether tax was required to be deducted under Section 195.
Referring to the Supreme Court’s decision in CIT v. Toshoku Ltd., the ITAT noted that commission earned by non-resident agents for services rendered outside India does not accrue or arise in India merely because the agents procured orders for an Indian business.
The Tribunal also relied upon GE India Technology Centre Private Limited v. CIT, in which the Supreme Court held that an obligation to deduct tax under Section 195 arises only when the payment made to a non-resident is chargeable to tax in India.
Thus, the mere fact that a payment is made by an Indian resident to a non-resident does not automatically trigger the withholding-tax provisions. The Revenue must first establish that the amount paid contains income taxable in India.
The ITAT found that the Revenue had not brought any material on record to demonstrate that the non-resident agents rendered any part of their services in India.
There was also no evidence establishing that the foreign agents maintained a permanent establishment or carried on business operations in India.
The Tribunal rejected the NFAC’s finding that the commission became taxable merely because it was payable in connection with export orders executed by the Indian company.
It held that such a connection with the assessee’s Indian export business was insufficient to treat the foreign agents’ commission income as accruing or arising in India when the services giving rise to the commission were performed entirely outside the country.
The Bench observed:
“The finding of the Ld. CIT(A) that the commission was taxable merely because it became payable in connection with export orders executed in India is therefore not sustainable.”
Following the decisions of the Supreme Court and the jurisdictional Gujarat High Court, the ITAT held that the commission of Rs. 9,66,471 paid to non-resident agents for services rendered outside India was not chargeable to tax in India.
The company was, therefore, under no obligation to deduct tax at source under Section 195.
Since there was no failure to comply with the withholding-tax provisions, the corresponding disallowance under Section 40(a)(i) was unwarranted.
The Tribunal deleted the entire disallowance of Rs. 9,66,471 and allowed the company’s appeal.
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