Section 40(a)(i) r.w.s 195 — Whether no tax is deductible u/s.195 on the commission payable to a non-resident for services rendered outside India — Held, Yes.

Therefore such payments made to overseas agents without deducting of TDS are not liable to be disallowed u/s.40(a)(i) — Held, Yes.

The assessee had paid commission to foreign agents for services rendered outside India. The Assessing Officer disallowed the same u/s.40(a)(i) on the ground that the tax was not deducted at source. The assessee contended that the payment was made through appropriate banking channels as per the RBI guidelines and regulations and hence was not liable to TDS. On assessee’s appeal with the CIT(A), the Commissioner allowed certain relief to the assessee. On the Department’s appeal, it was held:

Held:

Section 195 clearly states that the obligation to deduct tax is only on the income taxable in India. On the basis of section 9, the income is liable to be taxed only when it arises, accrues by virtue of its control or management being situated in India. In this case the overseas agents of Indian exporters operate in their own countries and therefore the income received by them is not liable to be taxed in India and hence do not attract TDS provisions. Also the Assessing Officer had not been able to prove the specific instruction of payee to receive the same payment in India. Hence he had erred in disallowing such agency fees u/s.40(a)(i) and thus the CIT(A)’s order ought to be upheld.