Law on dedutibility of TDS on commission paid by Indian entity to foreign agents

ACIT Vs. Manufax (India) S.B. (ITAT Agra)

This is Department’s appeal for assessment year 2010-11. The effective grounds are as follows:

“1. That the Ld. CIT(A)-1, Agra has erred in law and on facts in deleting the addition of Rs.36,30,862/- made u/s 40(a)(i) on account of non-deduction of tax on payments of commission to non-resident/foreign commission agents ignoring the facts that commission paid foreign commission agents is deemed to accrue or arise in India, which required deduction of tax as per section 195 of the I.T.Act..

2. That the Ld. CIT(A)-1 ,Agra has erred in law and facts in deleting the addition of Rs.36,30,862/- by ignoring the law as laid down as per section 9(1)(i) which clearly comes in the nature of payment by the assessee to nonresidents.”

2. The facts are that the assessee, who is engaged in trading, manufacturing and export of shoes, had filed its return of income for the year under consideration at income of Rs. 1,64,73,630/-. During the assessment proceedings, the AO had made an addition of Rs 70,54,210/- in respect of commission paid by the assessee to foreign agents. While making the said additions, the AO was of the view that the CBDT has issued Circular No. 7 dated 22.10.2009, by which, earlier Circulars No.23 dated 23 July 1969, Circular No.163 dated 29th May 1975 and Circular No. 786 dated 7th February 2000, which were based on Circulars No.23 , have been withdrawn. According to the AO Circulars No.23 was issued in the context of Section 9 of the Income Tax Act, which deems certain income to accrue or arise in India for non-residents. Thus, according to the AO, in view of this, assessee should have deducted tax at source. The AO further held that post withdrawal of Circular No. 786 , the income arising to foreign agents on account of export commission falls u/s 5(2) (b) of the Income-tax Act, as the income had accrued in India when the right to receive the income became vested. The AO also held that the position has entirely changed after the withdrawal of Circular No. 786 by the CBDT and other relevant Circulars by the CBDT. To further strengthen his view, the AO referred to a ruling by the Authority for Advance Rulings in the case of ‘S.K.F Boilers & Driers (P) Limited’, in which case, it was held that withholding of tax is mandatory u/s 195 of the I.T Act on export commission paid to a non resident agent, since commission is deemed to accrue or arise in India. The AO thus held that the provisions of section 195 are applicable in respect of payments of Commission w.e.f 12.10.2009 to 31.03.2010, on which basis, amount of Rs.70,54,210/- was disallowed u/s 40(a)(i) of the I.T. Act and added to the income of the assessee.

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