Case Note & Summary
The appellant, M/s Zephyr Biomedicals, a partnership firm, filed its return of income for Assessment Year 2006-2007 declaring total income of Rs.8,35,850/-. The Assessing Officer passed an assessment order under Section 143(3) of the Income Tax Act, 1961 on 16.12.2008, disallowing the claim of commission payment made to a non-resident. The appellant appealed to the Commissioner of Income Tax (Appeals), Panaji, who by order dated 28.08.2013 allowed the claim regarding non-applicability of TDS on the commission payment to the non-resident. The respondent (Revenue) appealed to the Income Tax Appellate Tribunal (ITAT) challenging the relief granted by the Commissioner on the applicability of Section 40(a)(ia). The appellant also filed cross objections claiming deduction under Section 80IB on the disallowance under Section 40(a)(ia). The ITAT, by order dated 08.06.2015, directed the Assessing Officer to readjudicate and examine the matter. The appellant then filed the present tax appeal before the High Court of Bombay at Goa. The substantial questions of law framed were whether the ITAT was right in upholding the disallowance of commission payment to non-resident without appreciating that the commission was not liable to tax, and whether the ITAT was right in upholding the disallowance under Section 40(a)(ia) by applying Explanation 2 to Section 195 when there was no chargeability to tax. The High Court, after hearing both sides, held that the commission paid to the non-resident was not chargeable to tax in India as the services were rendered outside India. Consequently, there was no obligation to deduct TDS under Section 195, and the disallowance under Section 40(a)(ia) could not be sustained. The court allowed the appeal, set aside the ITAT order, and restored the order of the Commissioner of Income Tax (Appeals).
Headnote
A) Income Tax - TDS on Commission to Non-Resident - Section 195, Section 40(a)(ia), Explanation 2 to Section 195 - Commission paid to non-resident agent for services rendered outside India - Income not chargeable to tax in India - No obligation to deduct TDS under Section 195 - Disallowance under Section 40(a)(ia) cannot be sustained - Held that when the income is not chargeable to tax, the provisions of TDS do not apply, and consequently, disallowance under Section 40(a)(ia) is not warranted (Paras 2, 6-7).
Issue of Consideration
Whether the ITAT was right in upholding the disallowance of the assessee's claim of commission payment to non-resident without appreciating that the commission was not liable to tax as per the provisions of the Income Tax Act, 1961, and whether the ITAT was right in upholding the disallowance under Section 40(a)(ia) by applying Explanation 2 to Section 195 when there was no chargeability to tax of income as per the provisions of the Income Tax Act, 1961.
Final Decision
Appeal allowed. ITAT order dated 08.06.2015 set aside. Order of Commissioner of Income Tax (Appeals) dated 28.08.2013 restored. No order as to costs.
Law Points
- Commission payment to non-resident not chargeable to tax in India
- No TDS deduction required under Section 195
- Disallowance under Section 40(a)(ia) not applicable when income not chargeable to tax
- Explanation 2 to Section 195 does not apply when income is not chargeable to tax
