TDS u/s 195 not deductible on commission paid to foreign agents for procurement of orders

ACIT Vs Alnoor Exports (ITAT Delhi)

ITAT Delhi held that commission paid to foreign agents for procurement of orders do not fall under Technical, Managerial or consultancy services. Accordingly, TDS not deductible on commission paid to such foreign agents.

Facts- The Assessing Officer while completing the assessment noticed that the assessee debited commission expenses of Rs.80,32,863/- in P & L account of export sales. AO disallowed commission expenses to foreign agents for non-deduction of TDS u/s. 195 of the Act. CIT(A) deleted the disallowance.

Conclusion- Held that the assessee was not liable to deduct TDS at source on commission paid to agents located outside India for procuring orders from buyers were all located outside India and not having permanent establishment in India. The provisions of section 195 of the Act were not applicable on the commission paid by the assessee as the same was not taxable in India as per the provisions of section 9(1) of the Act.

Hon’ble Delhi High Court in the case of DIT (International Taxation) Vs. Panalfa Autoelektrik Ltd. has held that the commission paid to foreign agents for procurement of orders do not fall under Technical, Managerial or consultancy services so as to attract the provisions of section 9(1)(vii) of the Act read with section 195 of the Act.

FULL TEXT OF THE ORDER OF ITAT DELHI

1. This appeal is filed by the Revenue against the order of the ld. Commissioner of Income Tax (Appeals)-11, New Delhi [hereinafter referred to CIT (Appeals)] dated 22.04.2015 for assessment year 2011-12.

2. The Revenue has raised the following grounds:-

“1. On the facts and in the circumstances of the case the Ld. CIT (Appeals) has erred in deleting the addition of Rs.80,32,863/- made on account of commission expenses in view of provisions of Section 195 of the Income Tax Act and CBDT’s circular No.7/2009 withdrawing the immunity available for such foreign remittances without TDS.

2. On the facts and in the circumstances of the case, the Ld. CIT (A) has erred in deleting the addition of Rs.13.94.5474, out of Rs.14,90,5474, made by AO on account of export promotion expenses since the assessee was under legal obligation to follow the provisions of TDS prescribed under Income Tax Act, 1961 before the credit or remittance of export promotion expenses

3. On the facts and in the circumstances of the case, the Ld. CIT (A) has erred in deleting the addition of Rs13,91,753/-made by Assessing Officer on account of interest expenses since the assessee was under legal obligation to follow the provisions of TDS prescribed under Income Tax Act 1961 before the credit or remittance of export promotion expenses

4. On the facts and in the circumstances of the case the Ld. CIT (A) has erred in deleting the addition of Rs.72 lacs made by Assessing Officer on account of preservation charges as it was clear from comparative chart given by the assessee that quantity of production has gone down from 1.72 lacs kg. in the year relevant to A.Y. 2010-11 to 1.68 lacs kg. in A.Y.2011-12 and the assessee was failed to established that there was any additional requirement of space for preservation of goods during the year. Further, the marginal increase in sales/turnover in sales/turnover from Rs.213.14 crore in A.Y. 2010-11 to Rs.217.34 crore in A.Y. 2011-12 was only due to marginal increase in the rate of realization/selling price.”

3. Ground No. 1 of grounds of appeal of the Revenue is in respect of deletion of disallowance of commission paid to foreign agents for non-deduction of TDS under section 195 of the Income Tax Act, 1961 (the Act).

4. Briefly stated the facts are that the Assessing Officer while completing the assessment noticed that the assessee debited commission expenses of Rs.80,32,863/- in P & L account of export sales. The assessee was required to furnish copies of agreements, details and evidences of services provided by the foreign agents and evidence of TDS made u/s 195 of the Act. Assessee furnished the details. The assessee submitted that it had paid commission on export sales, provided bill details of commission paid to the parties. The assessee explained that overseas commission agents took the orders to delegates and the amount of commission is duly mentioned on the shipping bills itself as per the guide-lines of the Reserve Bank of India (RBI). It was explained that after the order is executed and the payment is realized the commission was paid to foreign agents in due course. All the payments are through banking channels. It was explained that the remittance was made outside India for the services rendered outside India. Not convinced with the submissions the Assessing Officer disallowed commission expenses to foreign agents for non-deduction of TDS under section 195 of the Act. On appeal the ld. CIT (Appeals) deleted the disallowance.

5. The ld. DR strongly placed reliance on the order of the Assessing Officer.

6. The ld. Counsel for the assessee relied on the order of the ld. CIT (Appeals). He also placed reliance on the decision of the Delhi Bench of the Tribunal in the case of Welspring Universal Vs. JCIT reported in [(2015) 153 ITD 496] wherein it has been held that commission paid by the assessee to non-resident agents for procuring export orders was not chargeable to tax in the hands of the assessee. Assessee was not liable to deduct tax at source. The ld. Counsel also placed reliance on the decision of the Hon’ble Delhi High Court in the case of DIT (International Taxation) Vs. Panalfa Autoelektrik Ltd. [(2014) 49 com 412 (Del.)] wherein the Hon’ble Delhi High Court held that commission paid by the assessee to its foreign agents for arranging of export sales and recovery of payments could not be regarded as fees for technical services under section 9(1)(vii) of the Act. Reliance was also placed on the decision of the Hon’ble Delhi High Court in the case of CIT Vs. Grup ISM P. Ltd. [(2015) 378 ITR 205 (Del)] wherein the Hon’ble Delhi High Court held that where overseas enterprise acts as a liaison agent for an assessee and receives remuneration from each client successfully solicited for assessee such services cannot be said to be included within the meaning of consultancy services and would not come within the purview of the technical services under section 9 of the Act.

7. Heard rival submissions perused the orders of the authorities below. The ld. CIT (Appeals) deleted the disallowance of commission paid to foreign agents holding that the assessee was not liable to deduct TDS at source on commission paid to agents located outside India for procuring orders from buyers were all located outside India and not having permanent establishment in India. The provisions of section 195 of the Act were not applicable on the commission paid by the assessee as the same was not taxable in India as per the provisions of section 9(1) of the Act and, therefore, deleted the disallowance which was disallowed applying the provisions of section 40 of the Act for non-deduction of TDS while deleting the disallowance. The ld. CIT (Appeals) held as under:-

“4.1.3 I have considered the facts of the case, written submissions of the appellant and the findings of the Assessing Officer. The Assessing Officer made the impugned addition basis that the Commission Paid to Overseas Agents was covered u/s 195 and disallowed the expenditure u/s 40(a)(i) of the IT Act 1961. The appellant during the assessment proceedings filed a detailed reply that the payment of Commission to Overseas Agents are not covered u/s 195. The appellant also filed the documentary evidence in the form of Export Bills & Bill of Lading showing the commission to be paid, applications to bank for the payment mentioning the details of the party to which the payments were made and bank statements showing the actual amount paid. The assessing officer did not accept the contention of the appellant and made the addition.

4.1.4. Considering the above facts, the win minions and documentary evidence filed, I am of the view that the genuineness of the expenditure is fully substantiated. Also in view of the finding of the able Madras High Court in the ce of “The Commissioner of Income Tex Chennai vs. Faisan Shoes Pvt. Lad (MAD) TC. (A) No. 789 of 2013, the any of the fall judgment has been filed by the appellant during the proceedings, I am of the view that the payments of Commission to overseas agents is not covered u/s 9 of the Act and guilty Section 195 of the Act does not come into play as it is not a Fee the Technical Service. “The decision of the Supreme Court in Transmission Corporation of AP. Lad me referred by the assessing officer is not applicable so the facts of the present case. Accordingly, addition of Rs.80,32,863/- made by the Assessing Officer is deleted.”

8. We observe that the issue as to whether commission paid to foreign agents for procurement of orders is liable for TDS under section 195 read with section 9(1)(vii) of the Act is now settled by the decision of the Hon’ble Delhi High Court in the case of DIT (International Taxation) Vs. Panalfa Autoelektrik Ltd. [(2014) 49 com 412 (Del.)] wherein it has been held that the commission paid to foreign agents for procurement of orders do not fall under Technical, Managerial or consultancy services so as to attract the provisions of section 9(1)(vii) of the Act read with section 195 of the Act. Following the decision of the Hon’ble Delhi High Court in the case of DIT (International Taxation) Vs. Panalfa Autoelektrik Ltd. (supra) the co-ordinate bench of Delhi Tribunal had taken a similar view in the case of ACIT Vs. Kapoor Industries Ltd. [187 ITD 603]. Therefore, on careful perusal of the order of the ld. CIT (Appeals) we do not find any good reason to interfere with the findings of the ld. CIT (Appeals). The order of the ld. CIT (Appeals) on this issue is sustained. Ground No. 1 of grounds of appeal is rejected.

9. Ground No. 2 of grounds of appeal of the Revenue is in respect of deleting the disallowance of Rs.13,94,547/- out of Rs.14,90,547/- on account of export promotion expenses. disallowance of export promotion expenses for non-deduction of TDS. The Assessing Officer while completing the assessment noticed that the assessee claimed export promotion expenses of Rs.44,00,261/- as deduction. Out of Rs.44,00,261/- an amount of Rs.14,90,547/- pertained to participation charges in fair/ exhibitions. The assessee was required to furnish details of expenses with evidence for deduction of tax at source. The assessee furnished all the details and explained that the expenditure on foreign travel by the partners and staff, also expenditure incurred on export charges on their visit to India. Expenses also include various trade fairs/exhibitions of which assessee firm display its products for marketing. It was explained that all the expenses were incurred for the business of the assessee. However, since the assessee has not deducted TDS on export promotion expenses of Rs.14,90,547/- the Assessing Officer disallowed the same. On appeal the ld. CIT (Appeals) deleted the disallowance to the extent of Rs.13,94,547/- out of Rs.14,90,547/-.

10. The ld. DR strongly placed reliance on the order of the Assessing Officer whereas the ld. Counsel placed reliance on the order of the ld. CIT (Appeals).

11. Heard rival submissions perused the orders of the authorities below. The ld. CIT (Appeals) deleted the disallowance observing as under:-

“4.2 Ground No. 2 relates to addition of Rs. 14,90,547/- made by the assessing officer u/s 195/40(a)(i) on payments made to organizations located outside India as participation charges for trade fairs/exhibitions held outside India and not having any permanent establishment in India. As already discussed in Ground No.1, payments to organizations located outside India and not having permanent establishment in India are not covered u/s 9 of the Act and consequently Section 195 of the Act does not come into play as it is not a “Fee for Technical Service”. In respect to payment to one party namely M/s Comnet Exhibitions Pvt. Ltd. as agents of the organizers in Dubai, 20% of the amount paid may be treated as Income liable to be taxed in India as per Circular No. 3/2015 dated 12-02-2015 issued by the Central Board of Direct Taxes. The balance payment to persons located outside India is thus allowed. The appellant thus gets the relief as under:-

12. We see no infirmity in the order passed by the ld. CIT (Appeals). This ground is rejected.

13.1. Ground No. 3 of grounds of appeal of the Revenue is in respect of deletion of disallowance of interest expense. Briefly stated the facts are that in the course of assessment proceedings the assessee noticed that assessee has claimed interest expenses on secured and un-secured loans of Rs.18.47 crores and Rs.1.57 crores respectively as on 31.03.2011. The Assessing Officer noticed that the assessee has claimed bank charges and interest expenses of Rs.1.88 crores in the P & L account. The Assessing Officer was of the view that assessee had diverted funds in the name of partners of the firm. Assessee was required to furnish details of expenses outstanding as on 1.04.2010 and investment made during the year and to show cause as to why proportionate interest on such investments made in properties by partners should not be disallowed. Assessee furnished its reply stating that the firm had given funds to three parties for purchase of properties amounting to Rs.1.40 crores as on 31.03.2011 as under:-

13.2. It was explained that the amount paid to Advant IT Park Pvt. Ltd. was for booking of space at Noida for opening of new office and the other two payments were for properties in the name of partners and should have been debited to partners’ current account, but were omitted due to inadvertent mistake. It was also explained that the assessee firm has shown the balance in current account of the partners of the firm at Rs.16.80 crores on which no interest was paid. It was explained that the interest free funds available with the assessee firm duly covered these advances. Therefore, no adverse inference is called for. However, not convinced with the reply furnished by the assessee the Assessing Officer disallowed Rs.13,91,753/- towards interest. According to him fund was diverted for non-business purposes. On appeal the ld. CIT (Appeals) deleted the disallowance.

14. The ld. DR placed reliance on the order of the Assessing Officer and the ld. Counsel placed reliance on the order of the ld. CIT (Appeals).

15. Heard rival submissions perused the orders of the authorities below. The ld. CIT (Appeals) deleted the disallowance of interest for the reason that the advances made by the assessee for purchase of property of Rs.1.40 crores were fully covered by the non-interest bearing funds of Rs.16.80 crores available with the assessee. It was also the finding by the ld. CIT (Appeals) that the interest bearing funds of Rs.21.04 crores have been fully utilized for stock and sundry debtors. Considering the submissions and evidence furnished before the ld. CIT (Appeals) the ld. CIT (Appeals) deleted the disallowance of interest as the advances for purchase of property are covered by non-interest bearing funds which the assessee is having. The Revenue could not controvert the findings of the ld. CIT (Appeals) with evidences. Thus, we see no infirmity in the order passed by the ld. CIT (Appeals). We sustain the order of the ld. CIT (Appeals). Ground No. 3 of the Revenue’s appeal is rejected.

16.1. Ground No. 4 of grounds of appeal of the Revenue is in respect of deletion of disallowance of Rs.72,00,000/- made on account of preservation charges.

16.2. In the course of assessment proceedings the Assessing Officer noted that the assessee claimed preservation charges of Rs.1.32 lakhs in the P & L account and these expenses have been claimed in respect of Miki Export International, one of the sister concerns of the assessee covered under section 40A(2b) of the Act. The Assessing Officer noticed that the assessee paid preservation charges of Rs.5,00,000/- per month during the whole year and later on, on 31.03.2011 two additional entries in respect of expenses of Rs.60,00,000/- and Rs.12,00,000/- were made on 31.03.2011 in respect of credit of these amounts to M/s. Miki Exports International. The assessee was required to furnish details and explain to justify the claim of these expenses. The assessee submitted that during the assessment year it had hired one chamber for storage/preserving meat at Rs.5,00,000/- per month irrespective of any quantity at Meerut. It was explained that during the assessment year 2011-12 due to necessity it hired two chambers for storage/preserving meat at Rs.5,00,000/- each chamber per month irrespective of any quantity at Meerut due to shortage of space at Meerut also and paid Rs.12,00,000/-. However, the Assessing Officer on comparison of sales quantity and average rate between the assessment years 2010-11 and 2011-12 was of the view that there was no requirement of space of preservation of goods as compared to the preceding assessment year. Accordingly, he disallowed Rs.72,00,000/- paid towards preservation charges. On appeal the ld. CIT (Appeals) deleted the disallowance.

17. The ld. DR strongly relied on the order of the Assessing Officer and the ld. Counsel for the assessee strongly placed reliance on the order of the ld. CIT (Appeals).

18. Heard rival submissions perused the orders of the authorities below. We observe that in the course of proceedings the ld. CIT (Appeals) the assessee has filed written submissions explaining why the assessee paid preservation charges and considering the submissions of the assessee the ld. CIT (Appeals) deleted the disallowance observing as under:-

“4.4.2 In the course of the appeal proceedings, the AR of the appellant filed the following written submissions:-

“The assessee firm had paid Rs.1,32,00,000/- as preservation charges to its associate concern M/s Miki Exports International on account of hiring of cold storage chambers at Mumbai and Meerut where it doesn’t have its own facilities. In the immediately preceding year and amount of Rs.60,00,000/- was paid as preservation charges. During the course of assessment proceedings the assessee was asked to justify the claim.

In support of the claim, the assessee filed its submissions. However the assessing officer rejected the contention of the assessee and made an addition of Rs.72,00,000/- with the following observations:

“8.3 The claim of the assessee for increased expenses under this head has been examined with reference to the production and sales made during preceding year and the year under consideration. The comparative data for two years is as under:

8.4. From the above data, it becomes absolutely clear that there has been no increased requirement of space for preservation of goods as compared to the previous year. In fact, the quantity of production has gone down from 1.72 lacs kg in the year relevant to A.Y. 2010-11 to 1.68 lacs Kg. in A.Y. 2011-12. The marginal increase in the sale/turnover from Rs213.14 crore in A.Y. 2010-11 to Rs217.34 crore in AY2011- 12 has been only due to marginal increase in the rate of realization/selling price. Further, there is no justification of suddenly made additional credit of Rs72,00,000/- as preservation charges to the sister concern at the end of the Financial Year 2010-11 i.e. 31-03-2011. The assessee has also not filed any evidence to the effect that there was any additional requirement of space for preservation of goods during the year. Further no detail no agreement or any other document has been filed as to what the additional preservation facilities were availed by the assessee and as to when those facilities were taken. From the facts it becomes clear that additional credit of Rs.72 lacs in P&L account made in the account of sister concern M/s Miki Export International is for non-business consideration which has been shown by the assessee to reduce the tax liability of the assessee firm.

8.5. In view of the above facts of the case genuineness of incurring the expenses for the purpose of business in this year has not been established. Therefore out of the preservation charges of Rs.1.32 crores additional expenses of Rs.72 lacs as discussed above are disallowed in respect of Miki Export International”

The observations of the Assessing Officer are ill founded and not based on correct appreciation of facts. The fact is that the assessee is an exporter of meat which is a perishable product and has to be refrigerated at all times till the final delivery. The meat is processed and packed in the factory at Muzzafarnagar and then sent to the port in refrigerated containers. The assessee availed the cold storage facilities of it associate concern M/s Miki International which has its cold storages at Meerut and Mumbai. During A.Y2010-11 the assessee firm had taken only one chamber @ Rs. 5 lacs per month at Mumbai. In the current year, the assessee firm had taken two chambers at Mumbai and one chamber at Meerut @ Rs.10 lacs per month and Rs.1 lac per month respectively. For the sake of convenience, the year wise breakup of preservation charges paid is as under:

The meat is processed as per the availability of animals and is exported as per the requirements of the customers. There is a time lag between the processing and actual export, between which the processed meat is preserved in cold storage. The export needs custom and other clearances and there may be delays on account of non- availability of space in ships to the required destinations. The turnover cannot form the basis of requirement of preservation facilities. There may be times, when there are continuous orders supported by ready availability of animals and space on ships then preservation facilities may not be required. Similarly when there is disproportionate supply of animals vis a vis export orders the processed meat may have to be refrigerated for a longer period of time. The manufacturing activity cannot be closed in case the inventory is piled up. The plant has to run at the appropriate capacity at all times. The premises required for storage does not depend on the quantity sold but the level of stock maintained as per the availability of stocks and requirement of business. Also, the space at the cold storage may not be readily available on a short notice and has to be booked in advance

The quantitative details of the opening and closing stock and meat processed are as under:

Thus it is clear that the closing stock in current year is almost double as compared to the immediately preceding year, therefore, it needed double space for storage and thus took additional chambers on rent.

It is not a case where the rates given by the assessee for renting of chambers have increased in comparison to the immediately preceding year. The amount of preservation charges have increased because of increase in the storage space taken on rent during the year. The requirement of preservation facilities is the prerogative of the assessee and the assessing officer cannot step into the shoes of the assessee to judge the business expediency of incurring an expenditure i.e. hiring additional chambers. Had additional chambers not been hire, it would have resulted in loss of production resulting in more loss the additional cost of chambers.

In view of the above submissions supported by the documentary evidence filed, the addition of Rs.72,00,000/- deserves to be deleted.”

The appellant during the course of appellate proceedings further filed the following submissions vide letter dated 16-03-2015:-

“In continuation of written submissions filed by the appellant vide its letter dated 16- 02-2015 the following submissions are being offered in support of Ground No. 4 as under:-

The assessee firm has taken on rent 2 chambers @ Rs.5 lac per Chamber at Mumbai in comparison to 1 chamber @ Rs.5 lac per chamber per month in the per month immediately preceding year. The assessee firm has also taken on rent an additional small chamber at Meerut @ Rs.1 lac per month. The reasons and justification of additional chambers required is as under:

Comparative details of total meat processed and closing stock for two years:-

It can be seen that the processing of meat has from Kg. in the immediately preceding year to 62,02,264 Kg. in the current year at Mumbai. Moreover, the closing stock of meat has also almost doubled in comparison to the immediately preceding year. The meat which has been processed at Mumbai had to be preserved and stored in Mumbai only. For preserving the additional quantity of meat, extra space was required for which additional chamber was taken on hire.

The processing of meat has slightly decreased at Muzaffarnagar but the firm had to maintain an adequate level of storage facilities depending on the peak level of stock.

Due to inadequate supply of meat, additional storage facility was taken on rent at Meerut @ Rs.1 lac per month.

The meat is processed as per the availability of animals and is exported as per the requirements of the customers. There is a time lag between the processing and actual export, between which the processed meat is preserved in cold storage. The export needs custom and other clearances and there may be delays on account of non- availability of space in ships to the required destinations. The turnover cannot form the basis of requirement of preservation facilities. There may be times when there are continuous orders supported by ready availability of animals and space on ships then preservation facilities may not be required. Similarly when there is disproportionate supply of animals vis a vis export orders the processed meat may have to be refrigerated for a longer period of time. The manufacturing activity cannot be closed in case the inventory is piled up. The plant has to run at the appropriate capacity at all times. The premises required for storage does not depend on the quantity sold but the level of stock maintained as per the availability of stocks and requirement of business. Also the space at the cold storage may not be readily available on a short notice and has to be booked in advance.

The amount of preservation charges have increased because of increase in the storage space taken on rent during the year. The requirement of preservation facilities is the prerogative of the assessee and the assessing officer cannot step into the shoes of the assessee to judge the business expediency of incurring an expenditure i.e. hiring additional chambers. Had additional chambers not been hire it would have resulted in loss of production resulting in more loss the additional cost of chambers.

In view of the above submissions supported by the submissions and documentary evidence filed on the last date of hearing the addition of Rs.72,00,000/- deserves to be deleted.”

4.4.3. I have considered the facts of the case, written submissions of the appellant and the findings of the Assessing Officer. The Assessing Officer made the impugned addition invoking the provisions of Section 40A(2)(b) by treating the increase in expenditure as excessive payments. The submissions by the appellant that the storage capacity is to be maintained keeping in view the peak requirement and not on the basis of total sales is justified. Ultimately it is a business decision and does not call for the Assessing Officer to sit in judgment over this. The increase in expenditure is apparently due to increase in chambers taken on rent. The need for more storage space in Mumbai is also justified with the increase in processing at Mumbai

4.4.4. Considering the above facts, the written submissions and documentary evidence filed, I am of the view that the genuineness of the extra expenditure of Rs.72,00,000/- is for the purposes of business hence the addition is deleted.”

19. On careful reading of the observations of the ld. CIT (Appeals) we do not find any valid reason to interfere with the findings of the ld. CIT (Appeals) in deleting the preservation charges disallowed by the Assessing Officer. Ground raised by the Revenue is rejected.

20. In the result, the appeal of the Revenue is dismissed.

Order pronounced in the open court on : 25/07/2023.