Sesa Resources v. ACIT (ITAT Panaji)

DATE: August 20, 2015 (Date of pronouncement)
DATE: December 21, 2015 (Date of publication)
AY: 2009-10
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S. 195/ 40(a)(ia): In view of retrospective amendment to s. 195 to provide that s. 195 applies whether or not the non-resident person has a residence or place of business or business connection in India, commission to non-resident agents for services rendered outside India is liable for TDS u/s 195 and has to suffer disallowance u/s 40(a)(ia)

The assessee had made expenditure in the previous year relevant to AY 2009-10 on account of payments of commission to non-resident agents outside India. The AO disallowed the expenditure u/s 40(a) for non-deduction of tax at source. The CIT(A) deleted the disallowance on the basis that the amounts were not chargeable to tax in India. On appeal to the ITAT, held, allowing the appeal:

In respect of the issue as to whether the Assessee was liable to deduct TDS u/s 195 and whether the disallowance was liable to be made u/s 40(a)(ia) of the Act, it is noticed that the provisions of s. 195 has been amended by the introduction of the Explanation-II to the said section by the Finance Act, 2012, with retrospective effect from 1.4.1962, whereby it is clarified that ‘the obligation to comply with sub-section (1) and to make deduction thereunder applies and shall be deemed to have applied and extends and shall be deemed to have always extended to all persons, resident or non-resident, whether or not the non-resident person has (i) a residence or place of business or business connection in India…’ In view of the introduction of Explanation II to s. 195… the disallowance… would have to be restored…

Note: This decision seems contrary to the decision of the Hon’ble Bombay High Court in CIT v. Gujarat Reclaim and Rubber. Further, the reliance on Explanation II to s. 195 also appears to be misplaced. The Memorandum Explaining the Provisions of the Finance Act through which the Explanation was introduced specifically states, “Section 195 of the Income-tax Act requires any person to deduct tax at source before making payments to a non-resident if the income of such non-resident is chargeable to tax in India. “Person”, here, will take its meaning from section 2 and would include all persons, whether resident or non-resident. Therefore, a non-resident person is also required to deduct tax at source before making payments to another non-resident, if the payment represents income of the payee non-resident, chargeable to tax in India. There are no other conditions specified in the Act and if the income of the payee non-resident is chargeable to tax, then tax has to be deducted at source, whether the payment is made by a resident or a non-resident…” This clearly indicates that the amendment in the Finance Act, 2012, was only to clarify that the obligation u/s 195 attaches to resident payers as well as non-resident payers. In other words, the Explanation was inserted to negate the argument being advanced in cases of payments between two non-residents that there was no obligation u/s 195. The Explanation therefore does not at all change the position insofar as payments by a resident to a non-resident are concerned: these payments fall within the scope of s. 195(1) if the payment is chargeable to tax in the hands of the recipient non-resident. The requirement of the payment being chargeable to tax in the hands of the non-resident is not diluted at all. This aspect appears to not have been considered by the ITAT.

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