Sterling Ornaments Pvt. Ltd. vs. ACIT, Circle-24(2), New Delhi – ITA No. 6622/DEL/2019: Dispute Over Agency Commission and Tax Withholding Requirements

Sterling Ornaments Pvt. Ltd. vs. ACIT, Circle-24(2), New Delhi

ITA No. 6622/DEL/2019 – Assessment Year 2016-17

Appellant: Sterling Ornaments Pvt. Ltd., New Delhi

Respondent: ACIT, Circle-24(2), New Delhi

Date of Order: 9th November 2020

Pronounced on: 9th November 2020

Order Type: Final Tribunal Order

Background of the Case

The case involves Sterling Ornaments Pvt. Ltd., a company engaged in the business of manufacturing and exporting ornaments. For the assessment year 2016-17, the company made payments totaling Rs. 8,06,155/- as agency commission to foreign agents for promoting export sales outside India. The Assessing Officer (AO) disallowed this expense under Section 40(a)(i) of the Income Tax Act, 1961, on the grounds that the company failed to deduct tax at source under Section 195.

Grounds of Appeal

Sterling Ornaments Pvt. Ltd. filed an appeal against the disallowance, arguing that:

1. The payment of agency commission was not subject to tax withholding under Section 195 as the services were rendered outside India, and the income did not accrue or arise in India.
2. The disallowance under Section 40(a)(i) was therefore incorrect and should be reversed.
3. The issue was covered by the decision of the Income Tax Appellate Tribunal (ITAT) in the appellant’s own case for the assessment year 2011-12 (ITA No. 4395/Del/2014), where a similar disallowance was deleted.

Proceedings Before the ITAT

During the hearing, the counsel for the appellant reiterated the arguments made in the appeal and highlighted that the issue had already been decided in favor of the appellant in a previous assessment year. The counsel referred to the ITAT’s decision dated 27th June 2018 in ITA No. 4395/Del/2014, where the tribunal had held that the payment of commission to foreign agents was not subject to tax withholding under Section 195 as the income did not accrue or arise in India.

The Departmental Representative (DR), on the other hand, relied on the orders of the lower authorities but did not bring any new evidence or contrary decisions to support the disallowance.

ITAT’s Findings and Decision

The ITAT, after considering the submissions and reviewing the records, found that the issue was indeed covered by the tribunal’s decision in the appellant’s own case for the assessment year 2011-12. The tribunal noted that the facts and circumstances of the current case were similar to those in the earlier year and that no new arguments had been presented by the revenue to justify the disallowance.

The tribunal referred to several judicial precedents, including decisions of the Delhi High Court and the Madras High Court, which supported the appellant’s contention that payments made to foreign agents for services rendered outside India were not taxable in India and thus not subject to tax withholding under Section 195. The tribunal emphasized that the obligation to deduct tax at source under Section 195 arises only when the income is chargeable to tax in India under Section 9 of the Income Tax Act. Since the income in question did not accrue or arise in India, there was no requirement to deduct tax at source.

In light of the established legal position and the tribunal’s earlier decision in the appellant’s favor, the ITAT held that the disallowance under Section 40(a)(i) was not justified. The appeal filed by Sterling Ornaments Pvt. Ltd. was therefore allowed, and the disallowance was deleted.

Conclusion

The ITAT’s decision in this case reaffirms the principle that payments made to non-resident agents for services rendered outside India are not subject to tax withholding under Section 195 of the Income Tax Act. This ruling is consistent with the tribunal’s earlier decisions and various high court judgments, providing clarity on the tax treatment of such transactions.

This case underscores the importance of understanding the scope of Sections 195 and 40(a)(i) and the conditions under which tax withholding obligations arise. It also highlights the relevance of judicial precedents in ensuring consistency in tax assessments and appeals.

The decision is significant for businesses engaged in international trade and transactions, as it provides guidance on the tax implications of payments to foreign entities and the applicability of withholding tax provisions.

Order Pronounced in the Open Court on 9th November 2020

Per H.S. Sidhu, Judicial Member and Prashant Maharishi, Accountant Member.

Sterling Ornaments Pvt. Ltd. vs. ACIT, Circle-24(2), New Delhi – ITA No. 6622/DEL/2019: Dispute Over Agency Commission and Tax Withholding Requirements