Sections 9 and 195 – Non-resident – Income deemed to accrue or arise in India – TDS – Effect of sections 9 and 195 – Non-resident liable to tax only on incomes attributable to operations in India – Commission paid for procuring abroad – Non-resident not liable to tax on commission – Tax not deductible at source on commission

15. Evolv Clothing Company Pvt.
Ltd. vs. ACIT; 407 ITR 72 (Mad):

Date of order: 14^th
June, 2018

A. Y. 2009-10

Sections 9 and 195 – Non-resident – Income deemed to accrue or
arise in India – TDS – Effect of sections 9 and 195 – Non-resident liable to
tax only on incomes attributable to operations in India – Commission paid for
procuring abroad – Non-resident not liable to tax on commission – Tax not
deductible at source on commission

The assessee carried on business of
export of garments and claimed to have entered into agency agreements with a
non-resident Italian agent for procuring export orders for the assessee at a
commission. In the A. Y. 2009-10, the assessee paid a sum of Rs. 3,74,09,773/-
as commission to the foreign agent. According to the assessee, since no amount
of agency commission was chargeable to tax in India, the assessee did not
deduct tax at source before payment of commission to the foreign agent.
According to the assessee, the foreign agent rendered service akin to the
service of a broker to the assessee, procuring orders upon market survey with
regard to demand for the products of the assessee in the foreign country. The
Assessing Officer passed the assessment order disallowing the entire commission
u/s. 40(a)(i), because tax had not been deducted at source. This was upheld by
the Tribunal.

On appeal by the assessee, the
Madras High Court reversed the decision of the Tribunal and held as under:

“i)    Explanation
1 to section 9(1)(i) of the Income-tax Act, 1961, would attract liability to
Indian tax for a non-resident with business connection in India, only in
respect of income attributable to his operations in India. The amendment with
retrospective effect from June 1, 1976, by insertion of Explanation to section
9(2) can only apply to income by way of interest, royalty and fees for
technical services and not to brokerage or job-wise commission on activities
incidental to procurement of orders.

ii)    Section
195 attracts tax only on chargeable income, if any, paid to non-residents.
Where there is no liability, the question of tax deduction does not arise.
Where no part of income is chargeable in India, even clearance u/s. 195(2) or
(3) of the Act is not necessary. In Toshoku’s case (1980) 125 ITR 525, the
Supreme Court held that payments to agents for performance of services outside
India are not liable to be taxed in India.

iii)    From the service agreements with the agents abroad, it was clear
that the service rendered was essentially brokerage service. The very first
clause of the agreement stated “to procure orders”. The reference to market
research abroad or co-ordination with the supplier or to ensure timely payment
or making available its office space for visit by the suppliers, were
ordinarily things which any agent or broker undertook incidental to brokerage
service. There was no finding that any of the commission agents had any place
of business in India.

iv)   The
Assessing officer had in the assessment order, accepted that the assessee had
paid commission charges to oversees agents. It was not the case of the
Assessing Officer that any lump sum consideration had been paid for any
specific managerial, technical or consultancy services. The commission was not
taxable in India. The assessee was liable to deduct tax on such payment.

v)    The
appeal is allowed and the questions framed are answered in favour of the
assessee and against the revenue”