COMMISSION PAID TO NON RESIDENT HAVING NO PERMANENT ESTABLISHMENT IN INDIA IS NOT TAXABLE AND NO TDS IS REQUIRED TO BE MADE
Section 40(a)(ia) of the Income Tax Act, 1961 (‘Act’ for short) provides that the disallowance shall be made in case of any payment made which is chargeable under the 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. Section 195(1) of the Act provides that tax has to be deducted while making payment to nonresident which is chargeable under the provisions of the Act. Therefore, only when the income of the agent is chargeable to tax under the provisions of the act then only the TDS as per the provisions of the Act is to be made.
In ‘Deputy Commissioner of Income Tax V. Transformers and Electricals Kerala Limited’ – 2014 (11) TMI 275 - ITAT COCHIN the assessee is a public sector undertaking and is engaged in the manufacture and sale of transformers. M/s Al Hassan Electricals Company, Oman has been engaged by the assessee as their Commissioner agent and made payments for the services rendered. As per the agency agreement the agent shall provide advice on sales promotion and marketing with reference to the product in the territory. The agent shall provide assistance in the promotion of products and execution of the projects involving the products in the territory on behalf of the principal in various stages of the contracts. Clauses 8.1 and 8.2 of the agreement provides that as a consideration of the above services to be performed by the agent under the agreement, the principal shall pay to the agent a commission at 3% for all F.O.B. value of orders directly received by the principal in the territory. The agent shall be entitled to the commission on all direct orders in the territory received by the principal.
The assessee filed return for the assessment year 2006 – 07 on 27.11.2006 declaring a net loss of ₹ 21.59 crores. The assessment was completed on 29.12.2008 declaring a net loss of ₹ 11.92 crores. However the assessment was reopened under Section 147 of the Act on 16.3.2011 and completed the assessment on 22.12.2011. In the revised assessment the Assessing Officer has made disallowance under Section 40(1)(ia) of the Act on account of payments made without deducting TDS to the liaison Officer, professional charges and sales commission to selling agents.
The Assessing officer analyzed the agency agreement made with the agencies and found that M/s Al Hassan Electricals Company, Oman was a dependent agent of the assessee. He held that the agreement was not merely for selling of the products but includes various managerial and consultancy services like marketing, sales promotion and collection of market intelligence. The Assessing Officer held that the services rendered by the agent falls within the ambit of the Explanation to Section 9 of the Act and hence TDS should have been deducted on these payments.
The assessee filed appeal before Commissioner (Appeals) against the order of the Assessing Officer. Before the Commissioner (Appeals) the assessee contended the following:
The company entered into an agreement with M/s Al Hassan Electricals Company, Oman to render services for marketing company’s products in Sultanate of Oman;
All the services as per agency agreement were rendered outside India and the agents have no permanent establishment in India;
Even in the view of the Double Taxation Avoidance Agreement between the countries the amount cannot be held as taxable in India.
The Commissioner (Appeals) held that since the assessee has made payment to a company located and assessable in Oman, the Assessing Officer was not correct in making disallowance holding that the income had accrued in India and since the agreement was for providing marketing services and the company does not have any permanent establishment in India therefore, the Assessing Officer’s stand was not correct in making this disallowance.
The Revenue filed appeal before the Tribunal. Before the Tribunal the Revenue put forth the following arguments:
The selling agent though had rendered services abroad and was entitled to receive the commission abroad for the services rendered to the assessee;
He received the amount through or from business connection which he had in India or source of income is in India, being so, the income shall be deemed to accrue or arise in India;
Since the 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 under Section 40(a)(ia) of the Act;
The services rendered by the agent falls within the ambit of Explanation 2 of Section 5 of the 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;
Non deduction of tax towards the income is to be disallowed.
The assessee submitted the following before the Tribunal-
M/s Al Hassan Company, Onam has been accruing income outside India for the services rendered for marketing the assessee’s products in Sultanate of Oman and the said company has no business connection in India and therefore what is paid to the agent is not taxable in India;
Since the income is not taxable there is no question of deduction of tax at source from that payment;
No assessment in respect of the said company has been made in India;
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;
Section 195 contemplates not merely amounts, the whole of which are pure income payments;
It also covers payment which have an element of income embedded or incorporated in them;
Income though accrued in India the services were rendered to the assessee abroad and the payments were also received by him abroad, therefore, no income would arise under the provisions of Section 5(2)(b) read with Section 9(1) of the Act;
The Double Taxation Avoidance Agreement between India and concerned countries stipulates that the income of the enterprise of contracting State shall be taxable on in that state unless enterprise carries on business in the other contracting State through permanent establishments;
No question of deduction of tax on the above payment made to nonresident.
The Tribunal held that the condition precedent for deduction of tax is the income must be chargeable under the provisions of the Act. In this case the Assessing Officer has disallowed commission payment under Section 40(a)(ia) since no TDS was made on the payment. The Tribunal found that-
There is nothing on record to suggest that the income is chargeable to tax in India or the payment has been received by the non resident agents in India or by any other person on their behalf;
There is no finding that the non resident agents have a permanent establishment in India or have any business connection in India, by virtue of which the payment of commission would have accrued or arose in India;
The non resident agents did not carry any business operations in India and has acted as selling agents outside India;
Therefore the Tribunal held that the commission earned by the agents for the services rendered by them outside India cannot be considered as income chargeable to tax in India. Therefore no tax is to be deducted at source. The Tribunal dismissed the appeal filed by the Revenue.
By: Mr. M. GOVINDARAJAN
Section 40(a)(ia) of the Income Tax Act, 1961 (‘Act’ for short) provides that the disallowance shall be made in case of any payment made which is chargeable under the 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. Section 195(1) of the Act provides that tax has to be deducted while making payment to nonresident which is chargeable under the provisions of the Act. Therefore, only when the income of the agent is chargeable to tax under the provisions of the act then only the TDS as per the provisions of the Act is to be made.
In ‘Deputy Commissioner of Income Tax V. Transformers and Electricals Kerala Limited’ – 2014 (11) TMI 275 - ITAT COCHIN the assessee is a public sector undertaking and is engaged in the manufacture and sale of transformers. M/s Al Hassan Electricals Company, Oman has been engaged by the assessee as their Commissioner agent and made payments for the services rendered. As per the agency agreement the agent shall provide advice on sales promotion and marketing with reference to the product in the territory. The agent shall provide assistance in the promotion of products and execution of the projects involving the products in the territory on behalf of the principal in various stages of the contracts. Clauses 8.1 and 8.2 of the agreement provides that as a consideration of the above services to be performed by the agent under the agreement, the principal shall pay to the agent a commission at 3% for all F.O.B. value of orders directly received by the principal in the territory. The agent shall be entitled to the commission on all direct orders in the territory received by the principal.
The assessee filed return for the assessment year 2006 – 07 on 27.11.2006 declaring a net loss of ₹ 21.59 crores. The assessment was completed on 29.12.2008 declaring a net loss of ₹ 11.92 crores. However the assessment was reopened under Section 147 of the Act on 16.3.2011 and completed the assessment on 22.12.2011. In the revised assessment the Assessing Officer has made disallowance under Section 40(1)(ia) of the Act on account of payments made without deducting TDS to the liaison Officer, professional charges and sales commission to selling agents.
The Assessing officer analyzed the agency agreement made with the agencies and found that M/s Al Hassan Electricals Company, Oman was a dependent agent of the assessee. He held that the agreement was not merely for selling of the products but includes various managerial and consultancy services like marketing, sales promotion and collection of market intelligence. The Assessing Officer held that the services rendered by the agent falls within the ambit of the Explanation to Section 9 of the Act and hence TDS should have been deducted on these payments.
The assessee filed appeal before Commissioner (Appeals) against the order of the Assessing Officer. Before the Commissioner (Appeals) the assessee contended the following:
The company entered into an agreement with M/s Al Hassan Electricals Company, Oman to render services for marketing company’s products in Sultanate of Oman;
All the services as per agency agreement were rendered outside India and the agents have no permanent establishment in India;
Even in the view of the Double Taxation Avoidance Agreement between the countries the amount cannot be held as taxable in India.
The Commissioner (Appeals) held that since the assessee has made payment to a company located and assessable in Oman, the Assessing Officer was not correct in making disallowance holding that the income had accrued in India and since the agreement was for providing marketing services and the company does not have any permanent establishment in India therefore, the Assessing Officer’s stand was not correct in making this disallowance.
The Revenue filed appeal before the Tribunal. Before the Tribunal the Revenue put forth the following arguments:
The selling agent though had rendered services abroad and was entitled to receive the commission abroad for the services rendered to the assessee;
He received the amount through or from business connection which he had in India or source of income is in India, being so, the income shall be deemed to accrue or arise in India;
Since the 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 under Section 40(a)(ia) of the Act;
The services rendered by the agent falls within the ambit of Explanation 2 of Section 5 of the 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;
Non deduction of tax towards the income is to be disallowed.
The assessee submitted the following before the Tribunal-
M/s Al Hassan Company, Onam has been accruing income outside India for the services rendered for marketing the assessee’s products in Sultanate of Oman and the said company has no business connection in India and therefore what is paid to the agent is not taxable in India;
Since the income is not taxable there is no question of deduction of tax at source from that payment;
No assessment in respect of the said company has been made in India;
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;
Section 195 contemplates not merely amounts, the whole of which are pure income payments;
It also covers payment which have an element of income embedded or incorporated in them;
Income though accrued in India the services were rendered to the assessee abroad and the payments were also received by him abroad, therefore, no income would arise under the provisions of Section 5(2)(b) read with Section 9(1) of the Act;
The Double Taxation Avoidance Agreement between India and concerned countries stipulates that the income of the enterprise of contracting State shall be taxable on in that state unless enterprise carries on business in the other contracting State through permanent establishments;
No question of deduction of tax on the above payment made to nonresident.
The Tribunal held that the condition precedent for deduction of tax is the income must be chargeable under the provisions of the Act. In this case the Assessing Officer has disallowed commission payment under Section 40(a)(ia) since no TDS was made on the payment. The Tribunal found that-
There is nothing on record to suggest that the income is chargeable to tax in India or the payment has been received by the non resident agents in India or by any other person on their behalf;
There is no finding that the non resident agents have a permanent establishment in India or have any business connection in India, by virtue of which the payment of commission would have accrued or arose in India;
The non resident agents did not carry any business operations in India and has acted as selling agents outside India;
Therefore the Tribunal held that the commission earned by the agents for the services rendered by them outside India cannot be considered as income chargeable to tax in India. Therefore no tax is to be deducted at source. The Tribunal dismissed the appeal filed by the Revenue.
By: Mr. M. GOVINDARAJAN
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