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April 22, 2021

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

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

What is Section 40(a) (i) of the Income Tax Act?

Under section 40(a)(i) of the Income Tax Act, in case of payments made to non resident, the deductor is allowed to claim deduction for payments as expenditure in the previous year of payment, if tax is deducted during the previous year and the same is paid on or before the due date specified for filing of return of income under section 139(1) of the Act.

In case of non-deduction or non-payment of tax deducted at source (TDS) from certain payments made to residents, the entire amount of expenditure on which tax was deductible is disallowed under section 40(a)(i) for the purposes of computing income under the head “Profits and gains of business or profession”. The disallowance of whole of the amount of expenditure results into undue hardship.

Fact of the case

The appellant is a hundred percent Export Oriented Unit, is a Private Limited Company engaged in development and export of software. For the assessment year 2009-10, the appellant 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) of the Act. The disallowance under Section 40(a)(i) was on the ground that the commission paid was fees for technical services on which tax is deductible at source, which the assessee failed to deduct. The amount shown as commission paid to the non-resident was added to the total income of the Company.

On appeal, the first appellate authority concurred with the Assessing Officer with respect to the dis-allowance; but, however, allowed deduction under Section 10A. The Department approached the Tribunal and the assessee filed a cross objection. The Department’s appeal was allowed and the Assessing Officer was directed to consider the deduction under Section 10A. The cross objection of the assessee was rejected. The assessee is now not concerned with the remand made, since the Assessing Officer has allowed the deduction. The assessee is aggrieved with the order of the Tribunal affirming the disallowance under Section 40(a)(i).

Issue of the case

The appeal raises the question whether the commission paid to a non-resident, in the particular facts arising herein, is taxable under the Income Tax Act, 1961.

Observation of the Court

In this case, there is 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 cannot 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; the appellant 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 the appellant company to foreign buyers, makes the foreign countries the source of income. The execution of the project within India would not attract income tax since the income is derived from the sale of the product outside the territories of India and the execution is only to obtain such income from territories outside India. As has been declared by the Hon’ble Supreme Court in Sedco Forex International Drill Inc, “an explanation to a statutory provision may fulfil 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 cannot 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 we have concluded that the commission paid to the non-resident in the present case is not taxable under the IT Act by virtue of Section 5(2) read with Section 9(1)(vii)(b), there is no scope for finding any liability on the resident company to deduct tax from source, from payments made by them to the non-resident.

The Court relied on GE India Technology Centre, wherein it was categorically held that “the plain words of Section 195(1) which is in clear terms lays down that tax at source is deductible only from ‘sums chargeable’ under the provisions under the IT Act, i.e., chargeable under Sections 4, 5 and 9 of the IT Act” (sic. para 24). Court hold question No’s.1 and 2 in favour of the assessee and against the Revenue. Court declined to answer question Nos. 3 and 4 in view of our answer to the first two questions granting substantial relief to the assessee.


The Court rules in favour of the assessee. The appeal stands allowed and the assessment order to the extent it attempts to hold the payment made by the resident-company/assessee/appellant, to the non-resident agent as income deemed to arise or accrue in India would stand set aside. Parties are left to suffer their respective costs.

Read the Court Order from below


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