Foreign Commission for Export Orders Not Liable to Section 195 TDS: ITAT Delhi

Ajay Sharma Vs ITO (ITAT Delhi)

Material Facts: The assessee, engaged in the manufacture and export of readymade garments, challenged the disallowance of commission paid to a Swedish agent, Belinda Sandell, under Section 40(a)(ia) read with Sections 195 and 9 of the Income-tax Act. The commission related to procurement of export orders from a Swedish buyer and follow-up of invoice payments. The Assessing Officer treated the payment as Fees for Technical Services (FTS) under Section 9(1)(vii)(b) and disallowed it for non-deduction of tax under Section 195.

The appeals also challenged a rectification order passed by the CIT(A) under Section 154.

Procedural History

The matter had earlier been remanded by the Tribunal for fresh examination of whether the services constituted commission or consultancy services. After fresh assessment, the CIT(A) upheld the disallowance. Subsequently, the CIT(A) passed a rectification order under Section 154, leading to separate appeals before the Tribunal.

Legal Issues

• Whether commission paid to the overseas agent constituted Fees for Technical Services or commission for procuring export orders.
• Whether tax was deductible under Section 195.
• Whether the disallowance under Section 40(a)(ia) was sustainable.
• Whether the rectification order under Section 154 was valid.

Parties’ Submissions

The assessee submitted that the Swedish agent acted only as an intermediary by procuring orders, communicating specifications, coordinating with the overseas buyer and following up payments. The services were rendered entirely outside India and no written agreement existed between the parties. It was argued that the email correspondence merely related to order execution and commission invoices and did not establish consultancy or technical services.

The Revenue contended that the payments were consultancy fees taxable as FTS and liable for deduction of tax under Section 195. It also defended the rectification order, stating that it merely corrected an omission in the earlier appellate order without making any fresh addition.

Tribunal’s Findings

The Tribunal upheld the validity of the rectification order under Section 154, observing that it merely corrected an apparent mistake without enhancing the assessment or increasing the assessee’s tax liability. It also held that rectification before disposal of the appeal by the Tribunal was permissible.

On merits, the Tribunal found no evidence of any written agreement despite repeated references by the Revenue. It accepted the assessee’s statement that no written agreement existed and observed that the Department had produced no material proving otherwise.

After examining the email correspondence, the Tribunal held that the communications related to commission invoices, garment specifications, measurements, designs and execution of export orders. They did not establish rendering of technical or consultancy services. The Tribunal concluded that the payments were commission for procuring export orders and following up payments.

Since the services were rendered outside India, the Tribunal held that the commission was not taxable in India and the assessee was under no obligation to deduct tax at source under Section 195. Consequently, the disallowance under Section 40(a)(ia) was unsustainable. The Tribunal also noted that for AY 2015-16, the CIT(A) had decided the identical issue in favour of the assessee and no material was placed before it to show that the Department had challenged that order.

Final Ruling

The Tribunal partly allowed the appeal relating to the rectified order by granting relief on the merits of the disallowance while upholding the validity of the rectification. The appeal against the original order for AY 2013-14 was dismissed as infructuous following the rectification order. For AY 2014-15, the Tribunal allowed the appeal and deleted the disallowance on identical facts.

FULL TEXT OF THE ORDER OF ITAT DELHI

These three appeals by the assessee are taken up together as they involve inter-winding issues. For the sake convenience of adjudication, the appeals of the assessee for AY 2013-14 in ITA No.2772/Del/2024 and in ITA No.3770/Del/2024 are taken up concurrently.

2. The appeal of assessee in ITA No.2772/Del/2024 is directed against the order of Commissioner of Income Tax (Appeals), National Faceless Appeal Center, Delhi (hereinafter referred to as ‘the CIT(A)’) dated 26.04.2024. The assessee in appeal has assailed the order of CIT(A) by raising a solitary issue that is, confirming disallowance of Rs.31,61,046/- made by the AO u/s.40(a)(ia) r.w.s. 195 and section 9 of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) in respect of commission payment to overseas agent.

3. Appeal of the assessee in ITA No.3770/Del/2024 is against the order of CIT(A) dated 22.07.2024 passed u/s.154 r.w.s 250 of the Act. The assessee has assailed the order of CIT(A) on following grounds:

“1. On the facts and in the circumstances of the case and in law, the NFAC erred Order dated 22.07.2024, allegly rectifying order u/s 250 dated 26.04.2024, when appeal against the original order had already been filled vide form 36 dated 30.05.2024.

2. On the facts and in the circumstances of the case and in law, the NFAC erred in making alterations in order dated. 26.04.2024, without notice to the assessee and having become “functus offico”.

3. On the facts and in the circumstances of the case and in law, the NFAC erred in observing that rectification of order dated 26.04.2024 on account of omission of certain lines in para 7.3 thereof, while in rectified order substantial omission from original order has also been made.”

4. The assessee is in second round of litigation before the Tribunal for AY 2013­14. In the first round, the Tribunal in assessees appeal in ITA No.5084/Del/2017 vide order dated 26.10.2017 restored the issues back to the file of Assessing Officer (AO) for fresh consideration in light of agreement between the assessee and the agent and any other documentary evidence produce by the assessee to show that the services rendered are in the nature of commission services or in the nature of consultancy services.

5. Shri K. Krishnan, appearing on behalf of the assessee narrating facts of the case, submits that the assessee is engaged in the business of manufacture and export of readymade garments. Except for small portion of sales made to Hong Kong, substantial garments made by the assessee were exported to the Sweden. A leading garment brand of Sweden called Rabalder is the sole customer of the assessee in Sweden. As a trade practice in the garment industry, the large business houses reach out to the suppliers through sourcing agents. In assessee’s case, Belinda Sandell a Swedish National is the agent/intermediary. In the year 2011, the assessee was contacted by Belinda Sandell, who introduced herself as a sourcing agent for buying houses in Europe. Ms. Sandell forwarded to the assessee ‘Rabalder’s Development Package’ (in short RDP), a compendium of Rabalder’s specification in terms of design, material, processes, fabric, accessories, etc. The samples prepared by the assessee as per RDP were selected and hence, the assessee started getting orders from the house of Rabalder through Belinda Sandell. Belinda Sandell is an intermediary between Rabaldar of Sweden and the assessee. Belinda Sandell procured the orders from Rabalder, conveyed the details of the garment sizes, material, designs, etc. to the assessee. On dispatch of the garments with invoices, she would follow up with Rabalder for clearing of the invoices and the payments. Once, invoices are cleared she would raise her bills for commission. This process of getting orders from Rabalder Sweden through Belinda Sandell is in place since the year 2011. During the period relevant to assessment year under appeal, the assessee paid commission amounting to Rs.32,37,147/- to Belinda Sandell for export sales made to Rabalder. In the past, the assessee has never deducted any with holding tax on the payment of said commission. The services are rendered by Belinda Sandell outside India. The commission is paid by the assessee to non-resident for the services rendered outside India. The assessee has been consistently following this business practice, since 2011.

5.1 During scrutiny assessment proceedings, the assessee explained its business model and modus operandi of its overseas business transactions. It was explained that services of Belinda Sandell an agent were utilized for soliciting customers for assessee’s overseas business and to coordinate payments. It was also explained that Belinda Sandell carried her business activities outside India. Since, the conditions set out u/s.9 of the Act are not satisfied, the payments made by the assessee to the overseas agent are not liable to be taxed in India. The Assessing Officer (AO) rejected assessee’s submissions merely on the basis of some email communications between the assessee and Belinda Sandell. The AO erred in holding that Belinda Sandell is purely rendering technical services, hence, the payments made to her by the assessee are in the nature of Fee for Consultancy Services within the meaning of section 9(1) (vii)(b) of the Act, hence, are subject to TDS u/s.195 of the Act.

5.2 Aggrieved by the assessment order, the assessee carried the issue in appeal before the CIT(A). The First Appellate Authority vide order dated 26.04.2024, upheld the addition and dismissed appeal of the assessee. Against the said order of the CIT(A), the assessee filed an appeal before the Tribunal in ITA No. 2772/Del/2024 on 30.05.2024. Thereafter, the CIT(A) suo motu invoked the provisions of section 154 of the Act and, without affording any opportunity of hearing to the assessee, passed the impugned order holding that the payment made by the assessee is in the nature of Fees for Technical Services (FTS). The CIT(A) made the amendment in the original order at the back of the assessee, which is against the principles of natural justice. Hence, the order dated 22.07.2024 is liable to be quashed on this ground alone.

5.3. The ld. Counsel submits that in the first round, the Tribunal in ITA No. 5084/Del/2017(supra), remanded the issue back to the file of the AO for the limited purpose of re-examining whether the services rendered by the overseas agent were in the nature of consultancy services or purely commission services. In the remand proceedings, the assessee explained to the AO that it is consistent stand of the assessee right from the beginning, that there is no written agreement. In the year 2011, the assessee was contacted by the customer through an agent. The said agent is stationed in Sweden, and the assessee manufactures garments as per orders received through the agent. The reference to an agreement was made for the first time by the Departmental Representative (DR) before the Tribunal in the first round of litigation. The AO in remand proceedings without appreciating facts of the case and submissions of the assessee held that the payments made by the assessee to foreign agent Belinda Sandell are in the nature of FTS and the assessee ought to have deducted tax at source on such payments. The ld. Counsel contended that the authorities below have failed to appreciate that the payments made by the assessee to Belinda Sandell are commission for procuring orders. The emails between assessee and Belinda Sandell referred to by the AO in the assessment order would clearly show that no technical consultancy was ever provided by Belinda Sandell. In the mails referred, the assessee has been asking about the measurement charts and the details of sizes, colors, material and other details regarding garments to be manufactured as per the order. That there was no sharing of any technical information or was any consultancy services.

6. Per contra, Shri Vikram Singh Sharma, representing the Department submits that it is for the first time before the Tribunal that the assessee has stated that there is no agreement. The assessee never raised such a plea either before the AO or before the CIT(A), or even before the Tribunal in the first round. He contended that the submissions of the assessee have been ambiguous regarding non­existence of an agreement. He further submitted that there is no “make available” clause in the India–Sweden treaty; hence, the consultancy fee paid by the assessee to the foreign agent is liable to be taxed in India, and the assessee was under an obligation to deduct tax at source u/s. 195 of the Act. In the event of non-deduction of tax at source, the amount paid by the assessee is liable to be disallowed under section 40(a)(ia) of the Act. The ld. DR thus prayed for upholding the addition and dismissing appeal of the assessee.

6.1 The ld. DR further stated that in so far as the grievance of the assessee in ITA No.3770/Del/2024 regarding ex-parte proceedings u/s.154 of the Act, he contended that the CIT(A) has not made any new addition in order passed u/s.250 r.w.s 154 of the Act. The CIT(A) has only rectified a mistake in the order passed on 26.04.2024. The CIT(A) has clarified that while uploading the order dated 26.04.2024 the older version of the order was uploaded which resulted in omission of certain lines in para 7.3 of the order which were originally part of final order. The said mistake was rectified u/s.154 of the Act and the CIT(A) passed the rectified order on 22.07.2024.

7. Rebutting the arguments made on behalf of the Department, the ld. Counsel for the assessee submits that the agreement was never asked for either by the AO or the CIT(A) at any stage. Since, the agreement was never called for, the assessee had no occasion to deny existence of agreement. The ld. Counsel further pointed that in A.Y. 2015-16, on same set of facts, the CIT(A) decided the issue in favour of the assessee. In respect of the services rendered by the agent based in Sweden, the ld. Counsel reiterated that the assessee paid commission @ 10% to the agent for procurement of orders and for follow-up of payments after completion of the order.

8. Both sides heard, orders of the lower authorities examined. Before, we proceed to decide merits of the issue raised in the appeals for AY 2013-14, we deem it appropriate to deal with the issue of validity of the impugned order dated 22/7/2024 passed u/s.250 r.w.s 154 of the Act by the CIT(A). The contention of the assessee is that the CIT(A) has passed the order u/s.154 of the Act without affording opportunity of making submissions to the assessee. The CIT(A) has given reason for invoking provisions of section 154 of the Act. The same reads as under:-

“The order in this case numbered ITBA/NFAC/S/250/2024-25/1064397919(1)for AY 2013­14 was passed on 26/04/2024. However, final version of the order was inadvertently not uploaded on the system and instead unedited earlier version of the order was uploaded which resulted into omission of certain lines in para 7.3 of the order to be rectified. This being mistake apparent from record; the same is corrected, and the rectified order is passed as below:”

A perusal of modified para 7.3 of the impugned order dated 22.07.2024 would show that the CIT(A) has added certain lines to the existing paragraph 7.3 to strengthen his findings. The amendment made by the CIT(A) u/s.154 of the Act to its original order perse does not amount to enhancing an assessment or increasing liability of the assessee. No new addition has been made by the CIT(A) u/s.154 of the Act. The AO or the CIT(A) can rectify a mistake apparent on record and amend the order on its own motion. Notice to assessee is must where an amendment has the effect of enhancing the assessment or otherwise increasing tax liability of the assessee. In the instant case, we see no violation of principles of nature justice or violation of provisions of section 154 of the Act.

8.1. In so far as objection of the assessee that the order u/s.250 of the Act was rectified by the CIT(A) after filing of appeal by the assessee before the Tribunal, we find no force in the said submissions. The CIT(A) has passed rectified order u/s.250 r.w.s 154 of the Act before the appeal of assessee was heard. There is no impediment in rectifying a mistake u/s.154 of the Act by the lower authorities before the appeal is taken up for final hearing for adjudication by the Appellate Authority. Therefore, objection of the assessee against rectification of mistake u/s.154 of the Act by the CIT(A) is misplaced, hence, the same is rejected.

9. A perusal of grounds of appeal in ITA No. 3770/Del/2024 reveal that the assessee has not raised any grounds assailing addition on merits. Therefore, for adjudication of the issue on merits assailing disallowance u/s.40(a)(ia) of the Act, the ground raised by the assessee in appeal in ITA No.2772/Del/2024 is read with the grounds of appeal in ITA No.3770/Del/2024.

10. In so far as the facts narrated by the assessee explaining its business model, the same is not in dispute. The limited question for adjudication before us is, whether the services rendered by Blenda Sandell are technical in nature and hence, payment for the same made by the assessee are to be classified as Fee for Technical Services (FTS) or the payments are in the nature of commission for procuring business orders for the assessee and for follow up of payments from the vendees against the invoices issued by the assessee.

11. During the course of hearing of appeal and also from perusal of the impugned order, we observe repeated reference to an ‘agreement’. However, the said agreement is not part of records. The ld. Counsel for the assessee made a statement at Bar that no written agreement between the assessee and Blenda Sandell ever existed. The consistent stand of the assessee throughout is that there is no agreement. A reference to the alleged agreement was made for the first time by the DR in first round of appeal in ITA No.5084/Del/2017 before the Tribunal. Accordingly, the Tribunal while remanding the matter back to the AO for fresh consideration referred to the alleged agreement and other documents for consideration before making afresh assessment. Once, an existence of agreement has been specifically denied by the assessee, the assessee cannot be forced to produce a document which probably never exist. The agreement was never part of any tax proceedings, except allegation, no concrete evidence is produced by the Department to show existence of written agreement. The agreement appears to be a fiction. Therefore, the issue has to be decided on the basis of documentary evidences available on record and circumstances surrounding transactions. The ld. Counsel for the assessee has drawn our attention to various mails at pages 212 to 224 of the paper book. These e-mails between Blenda Sandell and the assessee are part of submissions made before the CIT(A). A perusal of emails show that they relate to the commission invoices by Blenda Sandell against the last shipment of consignment by the assessee or they are in respect of seeking details for execution of orders for various articles. The e-mails that have been reproduced in the assessment order no where reveals that there in respect of rendering consultancy service by the Blenda Sandell to the assessee. In fact, a close perusal of the mails reveals that Blenda Sandell has answered the queries raised by the assessee with regard to the orders of the garments viz. measurement, print, texture, dye, pottery program, etc. Exchange of such emails does not lead to any conclusion that the services rendered by Blenda Sandell are in the nature of technical services or consultancy services, payments for which can be characterized as FTS u/s.9(1)(vii) of the Act.

12. The payments made by the assessee to Blenda Sandell appears to be in the nature of commission for procuring orders and for follow up of payments against the invoices raised by the assessee. Since, the services are rendered by Blenda Sandell outside India, the payments for the same are not taxable in India. Hence, we are of considered view that the assessee had no obligation to deduct tax at source u/s.195 of the Act on such payments. The assessee has placed on record a copy of order of CIT(A) dated 28.10.2019 for AY 2015-16. The CIT(A) in his order has given a categoric finding that the payments made by the assessee to Blenda Sandell could not have been disallowed without making a case that Ms. Blenda Sandell has rendered any technical services to the assessee. The CIT(A) further observed that the email correspondence shows that the foreign agent is only forwarding details and inputs of the assessee by the buyers. There is no evidence of any technical services being provided to the assessee, Hence, the assessee was not liable to deduct tax u/s.195 of the Act and the payment to the foreign agent could have been disallowed. Apparently, order of the CIT(A) has been accepted by the Department. No evidence has been placed on record by the Department to show that the department has filed appeal against said findings of the First Appellate Authority. Thus, for the detailed reasons given above, the assessee succeeds on merits of the addition.

13. In the result, appeal of the assessee in ITA 3770/Del/2024 is partly allowed.

ITA No. 2772/Del/2024 for AY 2013-14

14. This appeal by the assessee is directed against the order of CIT(A) dated 26.04.2024 for AY 2013-14. Since, the CIT(A) suo moto rectified its order dated 26.4.2024 u/s 154 of the Act, the rectified order dated 22.07.2024 was subject matter of appeal in ITA no.3770/Del/2024. The said appeal has been adjudicated by us on merits as well. The present appeal has become infructuous, therefore, the same is dismissed as infructuous.

ITA No. 3771/Del/2024 for AY 2014-15

15. The solitary issue raised by the assessee in this appeal is against disallowance of Rs.32,37,147/- u/s.40(a)(ia) of the Act. The facts germane to the issue raised in the present appeal is identical to the one adjudicated by us in appeal of the assessee in ITA No.3370/Del/2024 for AY 2013-14.

16. Both sides unanimously submitted that the facts in the instant appeal are identical; hence, the submissions made in ITA No. 3770/Del/2024 (supra) would equally apply to the present appeal.

17. Since, the facts in the present appeal are identical to the appeal in ITA No.3770/Del/2024, the findings given while adjudicating the said appeal would mutatis mutandis apply to the present appeal as well. Thus, for parity of reasons, the appeal of the assessee on merits is allowed.

18. To sum up:

Order pronounced in the open court on Monday the 29^th day of June, 2026.