Commission Payments to Non-Resident Agents Not Taxable in India,

No Disallowance Under Section 14A for Absence of Exempt Income, and CSR Expenses Disallowance Upheld.

Issue:

Whether commission payments made to non-resident agents for services rendered outside India are chargeable to tax in India, thereby requiring TDS deduction by the assessee.
Whether disallowance under section 14A of the Income-tax Act, 1961 is permissible when no exempt income is earned from investments.
Whether Corporate Social Responsibility (CSR) expenses are allowable as business expenditure under section 37(1) of the Income-tax Act, 1961.

Facts:

The assessee made commission payments to foreign agents as sales and purchase commission without deducting TDS. The Assessing Officer (AO) contended that these payments were income chargeable to tax in India. The commission was paid to non-residents outside India for services rendered outside India.
The assessee made investments in equities but did not earn any exempt income from these investments during the relevant assessment year.
The AO observed that CSR expenses incurred by the assessee were not wholly and exclusively for business purposes. The assessee failed to provide material evidence to prove that these expenses were exclusively for business, and not personal or capital in nature.

Decision:

In favor of the assessee: The amount of commission paid to non-residents outside India for services rendered outside India does not fall into the category of income chargeable to tax in India. Therefore, the assessee was not liable to deduct TDS on such commission, and the provisions of section 40(a)(i) were not attracted for disallowance.
In favor of the assessee: Where an assessee makes investments but does not earn any exempt income from them, no disallowance under section 14A is permissible.
In favor of the revenue: Since the assessee failed to produce any material to prove that CSR expenses were incurred exclusively for business purposes and were not personal or capital in nature, the disallowance of these expenses was upheld.

Key Takeaways:

Commission paid to non-resident agents for services rendered entirely outside India is generally not considered income accruing or arising in India and thus not subject to TDS. This aligns with the principles of Article 7 of the OECD Model Convention (Business Profits).
Section 14A disallowance for expenditure related to exempt income is contingent upon the actual earning of exempt income. If no exempt income is generated from investments, no disallowance should be made.
To claim CSR expenses as allowable business expenditure under section 37(1), the assessee bears the burden of proving that these expenses were incurred wholly and exclusively for the purpose of business and were not personal or capital in nature. Failure to provide such evidence will result in disallowance.

IN THE ITAT JAIPUR BENCH ‘B’

Derewala Industries Ltd.

ACIT/DCIT

Narinder Kumar, Judicial member
and Gagan Goyal, Accountant member

IT Appeal No. 170 (JPR) of 2025
[Assessment Year 2017-18]

APRIL 8, 2025

Vinod Kumar Gupta, CA for the Appellant. Anup Singh, Addl. CIT-DR for the Respondent.

ORDER

Gagan Goyal, Accountant Member.- By way of present appeal, the assessee has challenged order dated 12.12.2024 passed by Ld. CIT(A) u/s 250 of the Income Tax Act, 1961 (in short “the Act”).

2. Vide impugned order, Ld. CIT (A) has confirmed the addition made by the Assessing Officer vide order dated 23.12.2019.

3. As per said assessment order, the Assessing Officer assessed total loss of the assessee at Rs. 4,48,87,707/-, after disallowing a sum of Rs. 3,63,287/- worked out u/s. 40(a)(i) of the Act due to non-deduction of the TDS; after disallowance a sum of Rs. 5,73,999/- worked out u/s. 14A of the Act; and after disallowance of a sum of Rs.75,000/-as per provisions of section 37(1) of the Act.

4. Learned AR for the appellant and Learned DR for the department has advanced arguments. File perused

5. As per impugned order passed by Ld. CIT(A), three notices dated 04.01.2021, 03.11.2011 and 03.12.2024 were issued by Ld. CIT(A) to the appellant for compliance of the directions contained therein, but the appellant failed to comply with the same. Consequently, Ld. CIT (A) dismissed the appeal and confirmed the assessment order, while observing that appellant had nothing to substantiate its contentions against the additions made by Assessing Officer.

6. It is true that the appellant was required to comply with the directions issued by Learned CIT(A) in the 3 notices, but it remained non compliant. In the given situation, while deciding the appeal, Learned CIT (A) should have dealt with the issues involved and decided the appeal recording his reasons and findings in respect of the 3 additions/disallowances.

7. No new evidence has been referred to or relied on by the appellant, in the course of arguments. We find that the three issues can be adjudicated here on the basis of material already placed on record.

8. As regards the first disallowance u/s. 40A (i) of the Act, the Assessing Officer observed that the assessee was found to have paid commission of Rs. 12, 10,958/- to foreign agents as sales commission and also by way of purchases commission, but he did not make any deduction by way of TDS in compliance of provisions of section 195(1) of the Act.

Ld. AR for the appellant has submitted that the authorities below erred as regards said disallowance, same having been made contrary to the law and a decision already in favour of the appellant.

In this regard, Ld. AR has relied on decision in ITA No. 60/JP/2019 dated 07.08.2019, in the case of the appellant itself.

Said decision in case titled as Derewala Industries Ltd., Jaipur v. DCIT, delivered on 07.08.2019 by a Co-ordinate Bench of Jaipur Benches, pertained to the Assessment Year 2015-16.

Further, it has been submitted that the Ld. CIT (A), while hearing appeals in the case of assessee-appellant itself, relating to Assessment Year 2012-13, 2013-14 and 2014-15 has set aside orders of said disallowance made by the Assessing Officer.

9. On the other hand, Ld. DR for the department has submitted that while confirming the disallowance, Ld. CIT(A) correctly relied on decision dated 20.08.2015, in the case of M/s. Sesa Resources Ltd. in ITA No. 267/PNJ/2015, by Co-ordinate Bench of Panaji.

10. Herein, the issue related to payment of commission and neither to royalty or fee for any technical services (FTS). Learned CIT (A) has upheld the assessment order while observing that as per Explanation II of section 195(1) of the Act, the assessee was under an obligation to deduct tax at source on account of payment of commission made to a non-resident.

11. Indisputably, in the above cited case of the assessee, relating to the assessment year 2015-16, before a Co-ordinate Bench of ITAT, Jaipur Benches, Jaipur, same issue i.e. addition due to the applicability of the provisions of section 40(a)(i) and section 195(1) of the Act, came up for adjudication.

Therein, the Co-ordinate Bench relied on previous decision of another Co-ordinate Bench of Jaipur Benches, in Satyam Polyplast v. DCIT, ITA No.158/JP/2019, and deleted the addition.

12. Relevant portion of decision in Satyam Polyplast’s case (supra), reproduced in the abovesaid case of the appellant itself, needs to be referred for ready reference. Same is extracted as under:

“5. We have considered the rival submissions as well as the relevant material on record. The assessee has paid commission to non-resident persons against the service of procuring orders for the assessee. The details of the commission paid by the assessee are as under:-

S. No. Name of Agent	Address	Commission
1. Mr. Claudio Haberl A/c	AV. Sesquicentenario 4540 CP1613, Buenos Aires, Argentina	22, 06,46,7.00
2. Md. Habibur Rahman	Kalibarl, Azizabad, Patharghata Barguna	3, 31,442.00
3. Nadia Anwar hasan Ali	AL-Shekh, Othman, Snafer Building Yemen	4, 68,120.00
4. Reinhard Bosse	UND Geschaftskunden Ag, Bahnhofstrabe 17, 49525 Lengerich, Germany	7, 10,060.00
5. Shamlan Naseer Ali	Doha, Qatar, YEMEN	1, 76,698.00
Total:		38, 92,787.00

The AO has disallowed the said amount U/s. 40(a) (i) on the ground that the assessee has not deducted the tax at source as required U/s. 195(1) of the Act. The AO has given much emphasis to explanation-II to Section 195(1) of the Act. The AO also held that the payment in question is Fee for Technical Services (FTS) because the non-residents have rendered the service of managerial in the nature which falls in the ambit of definition of Fee for Technical Services U/s. 9a(1)(vii) of the Act. It is pertinent to note that the provisions of Section 40(a)(i) can be applied only respect of sum payable or paid to a non-resident towards interest, royalty or Fee for Technical Services (FTS) or other sum chargeable under this Act which is payable to non-resident. For ready reference we quote the provisions of Section 40(a) (i) of the act as under:-“Chargeable under the head “Profits and gains of business or profession”,—

(a) in the case of any assessee—

[(i) any interest (not being interest on a loan issued for public subscription before the 1st day of April, 1938), royalty, fees for technical services or other sum chargeable under this Act, which is payable,—

(A)

outside India; or

(B)

in India to a non-resident, not being a company or to a foreign company, On which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid 45 [on or before the due date specified in sub-section (1) of section 139]:

[Provided that where in respect of any such sum, tax has been deducted in any subsequent year, or has been deducted during the previous year but paid after the due date specified in sub-section (1) of section 139, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid.] Explanation.—For the purposes of this sub-clause,—

(A)

“royalty” shall have the same meaning as in Explanation2 to clause (vi) of subsection (1) of section 9;

(B)

“fees for technical services” shall have the same meaning as in Explanation2 to clause (vii) of subsection (1) of section 9;”

The payment in question is commission and prima facie not royalty or Fee for Technical Services (FTS). The AO though observed that the payment in the nature of FTS, however the AO has not examined or not given the finding as to how the payment in question is FTS and what the nature of service rendered by the non-resident is. Even otherwise the issue of FTS has to be considered in light of definition provided in respect the DTAA. We find that the ld. CIT (A) for the assessment year 2013-14 has clearly given a finding that the payment in question is not fee for technical services but it is a regular payment to the non-resident in the nature of ordinary course of business. Even otherwise the ld. CIT (A) has upheld the order of the AO only on the ground that as per the explanation-II of Section 195(1) of the Act the assessee was under obligation to deduct the tax at source for making the payment of commission to non-resident. Therefore, the ld. CIT (A) has accepted the nature of payment as commission and not fee for technical service. The relevant finding of the ld. CIT (A) in para 4.3 as under:-

“4.3 I have gone through the assessment order, statement of facts, grounds of appeal and written submissions carefully. It is seen that the AO after discussing the provisions of Section 195, including the Explanation 2, has concluded that the appellant was required to deduct the tax at source while making the payment of above referred expenses even, to the non-resident persons, whether or not the non-resident person had a residence or place of business or business connection in India or any other presence in any manner whatsoever in India. The explanation 2 has been inserted by the Finance Act of 2012 with retrospective effect from 01.04.1962. I am of the considered view that the argument of the appellant that since the non-resident persons whom the payments were made did not have place of business or business connection in India, therefore, the appellant was not required to deduct tax at source on the above referred payments, is not correct. Regarding the second argument of the appellant that the income of the recipients of the above referred expenses was not “sum chargeable under the provisions of income Tax Act, 1961 therefore the provisions of Section 195(1) are not applicable to these payments” the A/R of the appellant was specifically requested to clarify whether any ruling was obtained from the Authority for Advance Ruling u/s 245(2), regarding non taxability of the income of the recipient in India under the Income Tax Act. The A/R submitted that no such ruling was obtained from AAR by the recipients of the above referred expenses. There is no other evidence on record to show that the sum received by the nonresidents in the form of selling commission (Rs. 38, 92,787/-) was not chargeable to tax under the Income Tax Act. There is no order or finding by any Income Tax Authority that the above referred sum of Rs. 38, 92,787/- was not chargeable to tax under I. T. Act, 1961. Therefore, I am of the considered view that the appellant was required to deduct tax at source while making payment of selling commission (Rs. 38, 92,787/-) to non-resident, whether or not the non-resident had a residence or place of business or business connection in India. The decision relied upon by the appellant are applicable only when there is evidence on record to show that the sum paid by the assessee was not chargeable to tax under the Income Tax Act. Therefore, disallowance of Rs. 38, 92,787/- made by the AO is hereby confirmed.”

Once the payment in question is commission then the provisions of Section 40 (a) (i) of the Act are applicable only if such sum is chargeable to tax under this Act. As per provisions of Section 5(2) of the Act the total income of non-resident includes all income from whatsoever sources derived which is received or deemed to be received in India accrues or arises or is deemed to accrue or arise to him in India during such year. For ready reference we quote to Section 5(2) reproduced as under:-

“5(2) Subject to 11 the provisions of this Act, the total income 12 of any previous year of a person who is a non-resident includes all income from whatever source derived which—

(a)

is received 14 or is deemed to be received in India in such year by or on behalf of such person ; or

(b)

Accrues or arises 14 or is 14 deemed to accrue or arise to him in India during such year.

Explanation 1.—Income accruing or arising outside India shall not be deemed to be received 14 in India within the meaning of this section by reason only of the fact that it is taken into account in a balance sheet prepared in India.

Explanation 2.—For the removal of doubts, it is hereby declared that income which has been included in the total income of a person on the basis that it has accrued 15 or arisen 15 or is deemed to have accrued 15 or arisen 15 to him shall not again be so included on the basis that it is received or deemed to be received by him in India.

Therefore, commission paid to non-resident outside India for the services rendered outside India will not fall in the category of the income received for deemed or received in India as well as accrues or arises or is deemed to accrue or arise in India. Thus, the said amount paid to non-resident does not fall in the scope of total income of nonresident and consequently it is not chargeable to tax in India under the provisions of the Act. Even otherwise the said income in the hands of non-resident has to be considered in the light of the provisions of DTAA between India and the Country of the non-resident. In the absence of P.E. of the non-resident in India such business income is not chargeable to tax in India. Accordingly, in the facts and circumstances of the case when the amount paid by the assessee is not chargeable to tax in India then the assessee is not liable to deduct TDS and consequently the provisions of Section 40(a)(i) of the Act cannot be invoked for making the disallowance. In the facts and circumstances of the case the disallowance made by the AO U/s. 40(a) (i) of the Act is deleted.”

13. In a case of payment of commission, provisions of section 40(a) (i) of the Act would come into application only where such sum is chargeable to tax under the Act.

14. In view of provisions of section 5(2) of the Act, amount of commission paid to a non resident outside India for the services rendered outside India will not fall in the category of income, and as such would not be chargeable to tax. So, the assessee was not liable to deduct TDS on the commission. Consequently, provisions of section 40(a) (i) of the Act were not attracted for the purposes of disallowance of said amount.

15. Applying the above cited decisions to the facts of the present case, the addition made by the Assessing Officer and upheld by Ld. CIT (A) deserves to be deleted. It is ordered accordingly.

16. As regards the 2^nd addition made by the Assessing Officer and upheld by the Ld. CIT (A), in view of the provisions of section 14A of the Act, the case of the department is that the assessee was found to have made investments of Rs. 5, 73, 99, 90/- in equities, but, the assessee, in its Profit and Loss Account, debited expenses by way of interest, to the tune of Rs. 17, 63, 22,237/-.

The Assessing Officer, while dealing with the issue observed that this was against basic principles of taxation to pay tax on the net income i.e. gross income minus expenses incurred to earn said income. The Assessing Officer further observed that expenses incurred can be allowed only to the extent those are relatable to the taxable income, and that herein, the assessee had debited interest expenses without specifically bifurcating the same as regards investments made.

17. Ld. AR for the appellant submitted that said addition, due to disallowance, is not inconsonance with settled law, as provisions of section 14A of the Act apply to earnings of actual exempt income, and not to notional income.

In support of his contention, Ld. AR for the appellant has relied on decision in PCIT v. GVK Projects and Technical Services(SC)

18. As per section 14A of the Act, for the purposes of computing total income, no deduction is allowable in respect of expenditure said to have been incurred by the assessee in relation to income which does not form part of the total income under the Act.

In PCIT v. GVK Project and Technical Services Ltd.

Therein, reference was made to decision by Delhi High Court in Cheminvest Limited v. CIT-VI, ITA No.749/2014) which was to the effect that section 14A would not apply where no exempt income is received or receivable during the relevant previous year.

In other words, where there is no exempt income earned by an assessee in the previous year, no question of disallowance of expenditure incurred to earn exempt income would arise.

19. Herein, it is not case of the department that the appellant earned any exempt income due to investments in equities. Rather, as rightly submitted on behalf of the appellant, the Assessing Officer observed in the assessment order that the investments made by the appellant in equities would not generate exempt income.

20. In the given facts and circumstances, no such disallowance attracting provisions of section 14A read with Rule 8D was permissible. As a result, addition made in this regard deserves to be set aside. It is ordered accordingly.

21. The third addition, as per assessment order, and upheld by Learned CIT (A) is of Rs. 75,000/-. While referring to provisions of section 37(1) of the Act, the Assessing Officer observed that the assessee was asked to justify expenditure incurred for the purposes of business and their relation to the business expenses for being allowed under said provision of law, but the assessee did not furnish any reply, and as such he presumed that the assessee had no objection towards disallowance of said amount debited in Profit & Loss Account.

Assessing Officer also observed that Corporate Social Responsibility expenses are not in the nature of expenses incurred wholly and exclusively for the purposes of business.

As noticed above, before Learned CIT (A), the assessee remained non compliant and as such the addition came to be confirmed.

Learned AR for the appellant does not dispute that no reply was furnished by the assessee to the queries raised by the Assessing Officer on this aspect.

22. The only contention raised by learned AR for the appellant is that such expenditure is allowable to be deducted under section 80G of the Act.

23. In this regard, suffice it to state that at no point of time, the assessee claimed said deduction under section 80G of the Act.

24. As regards section 37(1) of the Act, onus to prove that said expenses were incurred exclusively for the purposes of business, and that same were not of the form of personal expenses or capital expenses, was on the assessee. Since the assessee did not produce any material in this regard before the authorities below, and even before us nothing of the sort has been produced, so as to attract provisions of section 37(1) of the Act.

Therefore, we see no merit in this ground raised by the appellant or to delete said addition. We order accordingly.

25. As a result, the disallowance relating to Corporate Social Responsibility expenses is upheld.

26. In view of the above findings, this appeal is partly allowed; while setting the impugned order and additions as regards commission on sales and the exempt income, but, the appeal is dismissed as regards the third addition due to disallowance relating to CSR expenses.

File be consigned to the record room after the needful is done by the office.