Case Law Details
Case Name : CIT Vs Farida Leather Company (Madras High Court)
Appeal Number : Tax Case Appeal No. 484 of 2015
Date of Judgement/Order : 20/01/2016
Related Assessment Year : 2010-11
Suraj R. Agrawal
Brief of the Case:- Madras High Court held that Commission paid outside India to a non-resident for services rendered outside India is not chargeable to tax in India and is not liable for TDS
Facts of the case:
- The assessee is a firm, engaged in leather business, under the name and style of M/s. Farida Leather Company. The said company filed the return of income for the assessment year 2010-11, on 04.10.2010, admitting a total income of Rs.15,02,222/-. The return of income was processed and later scrutiny assessment was made and during completion of assessment, the Assessing Officer disallowed a deduction of Rs.52,17,014/-, being the commission paid to foreign agents, under Section 40 (a) (i) of the Income Tax Act, 1961 (hereinafter referred to as “the Act”).
- The CIT (A) allowed the appeal by the assessee and deleted disallowance made by the Assessing Officer on the ground that: (a) the agents abroad were non-residents operating outside India; (b) the commission paid relates to services provided outside India; (c) the agents did not have any permanent establishment in India; and (d) the amounts were remitted directly outside India.
- Aggrieved over the order of the CIT (A), the Revenue has filed an appeal to the Tribunal and the Tribunal allowed the Assessee’s appeal, following the earlier orders of the Tribunal. The Tribunal held that no disallowance of expenditure of commission paid by the assessee can be made on the ground of non-deduction of tax at source, while making payments by invoking provisions of Section 40 (a) (i) of the Act.
Contention by Respondent:
- the agency commission / sales commission paid by the assessee to non-resident agents, for the services rendered by them, outside India, in procuring export orders for the assessee, would not attract or partake the character of “fees for technical services” as explained in the context of 9 (1) (vii) of the Act and therefore, there is no scope for the application of the provisions of Section 195 of the Act (Tax Deducted at Source).
- It is also contended that as the non-resident agents have neither business connection in India nor they have permanent establishment in India, they are not liable to be taxed in India.
- Yet another contention of the learned counsel for the assessee is that: (a) the assessee paid the amount by way of commission to foreign agents for the services rendered outside India; (b) the Tax Deduction at Source (TDS) is required to be made on all payments to non-residents, only if such payments are liable to be taxed in India. (c) Following the decision of this Court, reported in The Commissioner of Income Tax v. Faizan Shoes Private Limited 2014 (8) TMI 170, the assessee is not liable to deduct tax at source, when the non-resident agent provides services outside India on payment of commission.
Ruling of Honorable ITAT/Court:
- merely because a person has not deducted tax at source or a remittance abroad, it cannot be inferred that the person making the remittance, namely, the assessee, in the instant case, has committed a default in discharging his tax withholding obligations because such obligations come into existence only when the recipient has a tax liability in India.
- The tax withholding liability of the payer is inherently a vicarious liability on behalf of the recipient and therefore, when the recipient / foreign agent do not have the primary liability to be taxed in respect of income embedded in the receipt, the vicarious liability of the payer to deduct tax does not arise. This vicarious tax withholding liability cannot be invoked, unless primary tax liability of the recipient / foreign agent is established. In this case, the primary tax liability of the foreign agent is not established. Therefore, the vicarious liability on the part of the assessee to deduct the tax at source does not exist.
- Further, just because, the payer / assessee has not obtained a specified declaration from the Revenue Authorities to the effect that the recipient is not liable to be taxed in India, in respect of the income embedded in the particular payment, the Assessing Officer cannot proceed on the basis that the payer has an obligation to deduct tax at source. He still has to demonstrate and establish that the payee has a tax liability in respect of the income embedded in the impugned payment.
- In the instant case, it is seen, admittedly that the nonresident agents were only procuring orders abroad and following up payments with buyers. No other services are rendered other than the above. Sourcing orders abroad, for which payments have been made directly to the non-residents abroad, does not involve any technical knowledge or assistance in technical operations or other support in respect of any other technical matters. It also does not require any contribution of technical knowledge, experience, expertise, skill or technical know-how of the processes involved or consists in the development and transfer of a technical plan or design. The parties merely source the prospective buyers for effecting sales by the assessee, and is analogous to a land or a house / real estate agent / broker, who will be involved in merely identifying the right property for the prospective buyer / seller and once he completes the deal, he gets the commission. Thus, by no stretch of imagination, it cannot be said that the transaction partakes the character of “fees for technical services” as explained in the context of Section 9 (1) (vii) of the Act.
- As the non-residents were not providing any technical services to the assessee, as held above and as held by the Commissioner of Income Tax (Appeals), the commission payment made to them does not fall into the category of “fees of technical services” and therefore, explanation (2) to Section 9 (1) (vii) of the Act, as invoked by the Assessing Officer, has no application to the facts of the Assessee’s case.
- In this case, the commission payments to the nonresident agents are not taxable in India, as the agents are remaining outside, services are rendered abroad and payments are also made abroad.
- When the transaction does not attract the provisions of Section 9 of the Act, then there is no question of applying Explanation 4 to Section 9 of the Act. Therefore, the Revenue has no case and the Tax Case Appeal is liable to be dismissed.
- In the result, this Tax Case Appeal is dismissed. The order passed by the Income Tax Appellate Tribunal is confirmed.