The Gujarat High Court has held that commission paid to foreign agents for soliciting customers for an Indian company's export business is not taxable in India when the services are rendered abroad and the recipients have no business connection in the country.
The court ruled that the commission was business income for the recipients, not fees for technical services. No tax deduction at source was therefore required on the payments in question.
A Division Bench of Justice Bhargav D. Karia and Justice Nirzar S. Desai held that the commission was not taxable in India in the absence of a business connection here.
The court observed, “We are of the opinion that as the commission is not fees for technical services under Section 9(1)(vii) of the Act and the same being in the nature of business income for the recipient, it would not be taxable in India in terms of Section 9(1)(i) of the Act in the absence of any business connection in India for the recipient.”
The ruling came in the Revenue's appeals against relief granted to DML Exim Pvt. Ltd., which is engaged in trading agricultural products, building construction and power generation. The appeals concerned Assessment Years 2011-12 and 2012-13.
The Assessing Officer had disallowed ₹21.60 crore and ₹9.73 crore in commission payments for the two assessment years under Section 40(a)(ia) of the Income Tax Act. The officer's case was that the company had failed to deduct tax at source on payments to foreign agents.
The commission was paid to non-resident agents for services rendered outside India, including soliciting customers for the company's export business. The court agreed with the findings of the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal that the payments were not taxable in India in the absence of a business connection. It consequently found no basis to sustain the disallowances.
The appeals also concerned contract cancellation charges of ₹2.80 crore for Assessment Year 2012-13 and ₹10.04 crore for Assessment Year 2011-12. While the Assessing Officer treated the ₹2.80 crore as a speculative loss, the Revenue challenged the genuineness of the ₹10.04 crore in cancellation charges.
DML Exim had explained that it entered into export contracts for cotton and other agricultural products. The contracts specified the goods, rates and delivery periods. When the company failed to fulfil the contractual terms, it settled the contracts with foreign buyers at prices below the predetermined rates and paid cancellation charges.
For the ₹2.80 crore disallowance, the court relied on the concurrent findings of the Commissioner of Income Tax (Appeals) and the tribunal. They had found that the cancellation charges related to the supply of goods dealt with by the company and had a direct nexus with its business. The court declined to admit the Revenue's question of law on this issue.
The court also rejected the challenge to the deletion of a ₹46.28 lakh disallowance for foreign exchange losses in Assessment Year 2012-13. The Assessing Officer had treated the loss as speculative because some dollar bookings made in advance were not set off against export remittances.
DML Exim explained that it entered into forward contracts with banks to hedge against currency fluctuations while implementing export contracts. The court noted that the company was not a foreign exchange dealer and accepted the concurrent findings that the contracts were incidental to its regular business. It held that the resulting loss was not speculative under Section 43(5) of the Act.
Another issue concerned a ₹6.02 lakh disallowance under Section 14A read with Rule 8D. The Assessing Officer had made the disallowance out of total interest expenditure of ₹9.90 crore, citing investments of ₹63.25 lakh that could generate income not chargeable to tax.
The court noted that the Assessing Officer had not recorded satisfaction regarding the correctness of the company's claim concerning expenditure related to income that did not form part of its total income. Such satisfaction was a precondition for invoking Section 14A read with Rule 8D.
The tribunal had also found no material to establish that the interest expenditure was directly or indirectly attributable to earning dividend income. The court declined to admit the Revenue's question of law on this issue as well.
Finding no reason to admit the questions of law raised by the Revenue, the Gujarat High Court dismissed both appeals.
For Appellant: Maunil G. Yajnik, Senior Standing Counsel
For Respondent: B.S. Soparkar, Advocate