No TDS on commission paid to non-resident agent for effecting exports

Device Driven (India) Pvt. Ltd. Vs CIT (Kerala High Court)

No TDS on commission paid to non-resident agent for effecting exports as it was not taxable under Income Tax Act

Conclusion: Services rendered for effecting exports within India by assessee-company to foreign buyers would not attract income tax since the income was derived from the sale of the product outside the territories of India and the execution was only to obtain such income from territories outside India.  Since commission paid to the non-resident was not taxable under the IT Act by virtue of Section 5(2) read with Section 9(1)(vii)(b), there was no scope for finding any liability on the resident company to deduct tax from source, from payments made by them to the non-resident.

Held: Assessee-company, a hundred percent Export Oriented Unit, was engaged in development and export of software. For the assessment year 2009-10, assessee filed a return declaring a total income of Rs.17,204/-, after claiming deduction under Section 10B in respect of profit from export of software. Under Section 143(1) the return was processed and the payments made to Mr.Balaji Bal, a resident of Switzerland, who also was a Director of the Company, was disallowed under Section 40(a)(i) on the ground that the commission paid was fees for technical services on which tax was deductible at source, which assessee failed to deduct. The amount shown as commission paid to the non-resident was added to the total income of the Company.  It was held that in the case there was no utilization of the services rendered by the non-resident agent within India. The projects executed by the resident company even within India was for sale to the foreign buyer and it could not be said that merely for reason of the execution in India the service was utilized in India. The software developed in India was also for export; assessee being a 100% EOU. The services rendered by the non-resident agent was for facilitating sale in the three outside territories. The services rendered for effecting exports by assessee – company to foreign buyers, made the foreign countries the source of income. The execution of the project within India would not attract income tax since the income was derived from the sale of the product outside the territories of India and the execution was only to obtain such income from territories outside India. As had been declared by the Hon’ble Supreme Court in Sedco Forex International Drill  Inc., “an explanation to a statutory provision may fulfill the purpose of clearing up an ambiguity in the main provision or an explanation can add to and widen the scope of the main section”. The Explanation could not be found to have taken away or curtailed the effect of the clear exceptions provided by sub-clause (b) of Section 9(1)(vii).  Since commission paid to the non-resident in the present case was not taxable under the IT Act by virtue of Section 5(2) read with Section 9(1)(vii)(b), there was no scope for finding any liability on the resident company to deduct tax from source, from payments made by them to the non-resident.

FULL TEXT OF THE JUDGMENT/ORDER of DELHI HIGH COURT

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