Commission payment, for sales and marketing support outside India, does not constitute income chargeable to tax in India

Recently, the ITAT Delhi in the case of Eon Technology (P) Ltd. Vs. DCIT [2011] 11 taxmann.com 53 (Del) /(343 ITR 366) (Del) held that payment by way of commission for sales and marketing support outside India does not constitute income chargeable to tax in India under the Income-tax act, 1961 (the Act).

Facts of the case

• The taxpayer was engaged in the business of development and export of software. The taxpayer claimed a deduction of INR 3,336,068 representing commission paid to M/s Eon Technologies, UK (ETUK) under an agreement with ETUK. As per the agreement, since the taxpayer was not in a position to interact and set up sales and marketing support management operations in the clients’ locations, ETUK was to invest in and operate the sales and marketing operations from UK.

• The taxpayer did not deduct tax at source in respect of the above payment on the premise that the payee was non- resident and the entire services had been rendered outside India. Accordingly, no income would either accrue or arise or deemed to accrue or arise to the payee in India.
• The Assessing Officer (AO) observed that ETUK being the sole selling and marketing agent for the taxpayer, it was rendering the service of the sale agent, thereby enabling it to earn the right to receive the income from the taxpayer. The AO further observed that since the situs or the origin of the receipt was in India, the income was liable to tax in India and that it was the corresponding liability of the taxpayer to make the payment of the amount at the place of accrual of the income and this having not being done, the AO made a dis allowance under section 40(a)(i) of the Act in respect of payments made to ETUK since tax was not deducted at source under section 195(1) of the Act.
• The Commissioner of Income-tax [CIT (A)] relying on the decision of GE India Technology Centre Private Limited reported in (2010) 327 ITR 456 (SC)  held that charge ability to tax of the sum paid under the provisions of the Act was a statutory pre- condition for invoking section 195(1) of the Act and that commission paid by the taxpayer to ETUK which had rendered services outside India was not chargeable to tax in India and hence not subject to the provisions of section 195(1) of the Act. The [CIT (A)] further relying on the decision of CIT v. Toshoku Ltd. [1980] 125 ITR 525 (SC), wherein it was held that “business connection” presupposes that the non-resident carried on business in India, contended that since no business was carried out in India by ETUK, it had no business connection and the commission earned did not deem to accrue or arise in India.

Taxpayer’s contentions